i   OF    fc! 


W!T  '.OMPLIMENTS 

OF  CA- 


GIFT  OF 


TEXT  BOOK 
OF   LIFE    INSURANCE 


Being  tte   First  Post-Graduate   Course 

OF  THE 

Pacific  Mutual  School 

FOR 

V  • 

Salesmen 


With  the  Compliments  of 

THE  PACIFIC  MUTUAL  LIFE  INSURANCE  COMPANY 
OF  CALIFORNIA 


Copyright  1916  and  1917 

By  THE  PACIFIC  MUTUAL  LIFE  INSURANCE  COMPANY 
OF  CALIFORNIA 


"efficient?" 


PACIFIC    MUTUAL   SCHOOL 
FOR    SALESMEN 


FIRST  POST-GRADUATE  COURSE 


NUMBER  ONE 


©rtgtn,  Bebelopment,  Character 

anb  economic  Cffecte  of 

Life  Sntfurance 

BY  FORBES  LINDSAY 


Copyrighted  by 

THE   PACIFIC    MUTUAL    LIFE    INSURANCE   COMPANY 

OF  CALIFORNIA 

1916 


•»,  ' 


DIRECTIONS 


In  studying  these  lessons  constantly  bear  in  mind 
their  practical  purpose.  Unless  you  can  make  them  serve 
in  helping  you  write  Life  Insurance  they  are  worthless. 


One  pamphlet  will  reach  you  not  later  than  the  1st 
and  15th  of  every  month.  Answers  to  the  questions 
must  be  mailed  to  the  School  not  later  than  the  1st  or 
15th  of  the  month  falling  two  weeks  after  date  of  receipt. 


Use  a  typewriter  or  ink  in  writing  answers.  Number 
each  answer  to  correspond  with  the  number  of  the 
question  to  which  it  relates,  and  give  the  number  of  the 
pamphlet  to  which  the  answer  refers.  Questions  need 
not  then  be  repeated.  On  every  answer  paper  place 
your  name  and  address,  as  well  as  the  date  on  which  the 
paper  is  mailed. 


Make  your  answers  brief  and  to  the  point.  Use  your 
own  words  whenever  you  can.  Write  to  the  Superin- 
tendent of  the  School  for  any  explanation  or  information 
you  may  desire. 


The  regulations  are  simple.       Strict     observance    of 
them  will  be  required  of  students. 


(Origin,  29ebelopment,  Character 

anb  economic  Cffecte  of 

Htfe  Snsurance 

BY  FORBES  LINDSAY 

With  the  first  recognition  of  domestic  obligations 
there  must  have  come  a  realization  of  the  need  for  pro- 
vision against  the  premature  death  of  the  head  of  the 
family.  We  find  among  primitive  people  at  this  day 
various  methods  of  meeting  this  unavoidable  necessity, 
and  it  is  safe  to  assume  that  these  methods  are  survivals 
of  prehistoric  practices.  The  communal  system  of  prop- 
erty ownership  may  well  have  had  its  origin  in  a  design 
to  protect  helpless  and  dependent  members  of  a  clan  or 
tribe. 

Life  Insurance  is,  in  fact,  one  of  the  natural  institu- 
tions which  have  come  into  being  as  inevitable  factors 
in  our  social  evolution.  The  practical  necessity  for  Life 
Insurance  and  the  fundamental  principle  of  its  operation 
must  have  been  dimly  realized  with  the  first  observation 
of  disaster  to  the  welfare  of  dependents  entailed  by  the 
death  of  their  former  supporter,  coupled  with  the  thought 
that  the  loss,  if  distributed  over  the  community,  would 
hardly  have  been  felt  by  any  individual  member  of  it. 
As  the  appreciation  of  universal  liability  to  untimely 
death  deepened  and  spread,  the  idea  of  co-operative  pro- 
vision against  its  material  consequences  expanded  and 
crystallized.  However,  the  need  of  systematic  Life  In- 
surance was  felt  for  many  centuries  before  the  want  was 
supplied.  Fire  and  marine  insurance  had  been  in  exten- 
sive practice  for  long  before  Life  Insurance  on  an  or- 
ganized basis  was  introduced.  This,  without  doubt,  be- 
cause in  the  earlier  stages  of  society  the  economic  value 
of  property  was  relatively  greater  than  that  of  human 
life. 

The  practical  application  of  the  principles  of  insur- 

Copyrighted  1916  and  1917  by  The  Pacific  Mutual  Life  Insurance  Company  of  California 

307331 


ance,  in  more  or  less  crude  forms,  dates  back  to  ancient 
times.  The  Phoenician  traders  and  mariners  used  to 
put  a  certain  percentage  of  the  profits  of  each  successful 
voyage  into  a  fund  which  was  drawn  upon  to  relieve  the 
families  of  sailors  who  were  killed  or  disabled  in  service. 
The  Roman  Collegia  and  the  associations  of  Saxon  serfs 
paid  death  indemnities  and  benefits  in  cases  of  accidents 
and  sickness.  (See  Anderson,  "History  of  Commerce"; 
;Eden,  "State  of  the  Poor";  Turner,  "History  of  Anglo- 
Saxons";  Walford  and  Toulmin  Smith  on  the  Guilds; 
Encyclopedia  Britannica;  Insurance  Encyclopedia.) 

From  the  beginnings  of  personal  protection  developed, 
after  the  suppression  of  the  guilds  at  the  close  of  the 
reign  of  Henry  the  Eighth,  the  Friendly  Societies  and 
Burial  Clubs,  which  were  the  forerunners  of  modern  Life 
Insurance  companies.  The  history  of  the  former  associa- 
tions is  preserved  in  Parliamentary  blue-books  and  re- 
ports of  Royal  Commissions.  These  documents  throw 
interesting  light  on  the-,  fundamental  defects  of  the  As- 
sessment System  and  make  a  lucid  presentation  of  the 
principles  of  State  or  social  insurance. 

The  prototype  of  the  modern  Life  Insurance  contract 
is  a  document  dated  June  18,  1583.  It  was  an  agreement 
on  the  part  of  sixteen  merchants  of  the  city  of  London 
to  insure  the  life  of  one  William  Gybbons  for  a  term  of 
twelve  months  in  the  amount  of  383^-i  pounds  sterling, 
at  a  premium  of  8  per  cent.  Judicial  and  other  records 
reveal  a  few  similar  transactions  during  the  seventeenth 
century..  All  these  agreements  were  essentially  in  the 
nature  of  wagers.  The  transactions  were  far  too  few  to 
be  affected  by  the  Law  of  Averages,  and  there  was  no 
data  on  which  to  estimate,  even  remotely,  an  equitable 
charge  for  the  risk.  Indeed,  Life  Insurance  had  been 
conducted  by  corporations  for  well-nigh  a  century  before 
reliable  mortality  statistics  were  available  to  their  actu- 
aries. The  business  as  carried  on  at  its  inception  was 
haphazard  and  speculative  in  the  extreme.  No  medical 
examinations  were  required,  nor  was  family  history  taken 
into  account.  The  same  premium  was  charged  at  all 
ages,  and  the  question  of  moral  hazard  was  ignored.  For- 
tunately for  the  survival  of  the  institution  the  estimates 
of  mortality  were  enormously  too  high  and,  despite  the 
reckless  acceptance  of  risks,  the  profits  of  the  early  com- 


panics  were  so  large  as  to  stimulate  extension  ol  trie  "busi- 
ness. 

Annuities,  necessarily  based  on  faulty  calculations, 
had  been  sold  by  governments  and  private  individuals 
for  long  before  1698,  when  the  Mercers  Company  of  Lon- 
don opened  the  first  ofBce  for  the  public  sale  of  Life 
Insurance.  This  was  followed  in  the  next  year  by  the 
Society  of  Assurances  for  Widows  and  Orphans.  In 
1706  the  first  mutual  Life  Insurance  company  was  organ- 
ized under  the  name  of  the  Amicable  Society  for  a  Per- 
petual Assurance  Office. 

Strangely  enough,  the  "membership  was  limited  to  two 
thousand.  A  messenger  was  sent  round  once  a  year  "to 
inquire  if  any  of  the  said  members  are  dead  and  take 
care  of  making  such  proof  of  such  death  as  is  required 
by  the  by-laws  of  the  said  corporation  in  order  to  pay 
such  claims."  Unlike  many  of  the  companies  which 
later  entered  the  business,  the  Amicable  scrutinized  ap- 
plicants with  considerable  care  and  practiced  a  system 
of  inspection,  if  we  may  infer  as  much  from  an  entry  in 
its  records  instructing  the  auditor  of  the  Society  "to 
write  to  the  Post  Master  or  some  other  person  of  Stal- 
bridge  in  Dorset  for  an  account  of  a  Proposer's  Health 
and  Constitution  and  whether  he  be  a  man  of  sober  and 
regular  life."  It  is  surprising  to  find,  as  early  as  1713, 
a  foreshadowing  of  the  agent's  license  in  the  order  impos- 
ing a  fine  of  five  pounds  upon  any  employe  found  "to 
trade  or  intermeddle  with  the  disposal  or  buying  or  sell- 
ing of  any  policy  or  policies  without  an  order  of  the  Court 
of  Directors." 

"As  regards  investments,  the  mention  of  South  Sea 
Bonds  in  the  list  is  startling  enough  in  itself;  but  when 
one  turns  to  the  'Various  Orders  of  the  Board  for  invest- 
ing the  Society's  funds'  and  reads  of  purchases  and  sales 
of  Malt  Tallies,  Mine  Adventure  Bonds,  Victualling  Bills, 
Hollow  Sword  Blade  Bonds  and  Tickets  in  State  Lot- 
teries— which  are  recorded  in  the  Minutes — one  is  strik- 
ingly reminded  of  the  peculiar  conditions  and  limitations 
of  the  investment  market  of  those  far-off  days." 

The  earliest  evidence  of  formal  recognition  of  occu- 
pational hazard  is  found  in  a  regulation  of  1736,  barring 
seafaring  men  from  the  "Advantages  of  Insuring  their 


Lives."  In  1760  it  was  detfded  that  militiamen  should 
not  be  disqualified  for  insurance. 

The  first  record  of  Life  Insurance  advertisement 
seems  to  be  an  order  of  the  Society's  Board  hi  1749,  di- 
recting that  "the  Register  before  the  next  Court  procure 
Two  Dozen  of  the  Printed  Terms,  Methods  and  Ad- 
vantages of  Insuring  Lives  in  the  Society  to  be  pasted 
on  Boards  and  framed/'  after  whfch  they  were  distributed 
"among  the  several  coffee  houses  mentioned  in  a  paper 
to  him  delivered." 

Neither  the  Amicable  nor  the  Equitable  employed  so- 
liciting agents  but  in  the  last  quarter  of  the  eighteenth 
century  both  found  ft  necessary  to  invoke  the  law  against 
persons  who  falsely  represented  themselves  as  authorized 
to  write  policies  for  those  companies. 

A  curious  practice  prevailed  at  that  time  which  might, 
perhaps  with  advantage,  be  revived.  A  policyholder  was 
permitted  to  substitute  for  himself  another  risk  of  the 
same  age  or  younger,  subject  to  the  approval  of  the  in- 
suring company.  If  is  conceivable  that  such  a  privilege 
in  latter-day  contracts  would  entail  the  continuance  of 
a  large  amount  of  insurance  which  is  terminated  or  re- 
duced by  lapse  or  surrender. 

After  a  long  and  honorable  career,  the  Amicable  was 
absorbed  by  the  Norwich  Union  Life  Office  in  1866.  The 
latter  company  has  published  a  highly  instructive  and  in- 
teresting history  of  the  former  Life  Insurance  institution. 

At  the  close  of  the  eighteenth  century  there  were 
eight  life  offices  in  active  operation  in  Great  Britain,  and 
ten  or  more  came  into  existence  during  the  ensuing 
decade. 

In  1756  a  dissatisfied  policyholder  of  the  Amicable 
decided  to  form  a  new  company  on  a  more  equitable  plan 
than  that  of  the  parent  organization,  which  made  the 
same  charge  to  all  insurants,  regardless  of  age,  condition 
or  occupation.  Six  years  passed  before  the  project  took 
material  form.  To  quote  Hoffman  : 

"When  the  London  Equitable  was  started  in  1762 
very  little  was  known  regarding  the  true  cost  of  insur- 
ance as  conditioned  by  the  normal  rate  of  mortality,  in- 
terest and  expense.  *  *  *  At  age  30  a  premium  of  about 
$40  was  charged  for  each  $1,000  of  insurance,  which,  of 
course,  was  entirely  too  high  and  led,  in  subsequent 

4 


years,  to  the  division  of  increasing  dividends  to  a  most 
fortunate  surviving  group  of  policyholders." 

The  company  was  phenomenally  fortunate  in  several 
of  its  heaviest  investments,  and  the  large  resultant  profits 
encouraged  the  organization  -of  numerous  companies  on 
the  assumption  that  they  would  enjoy  a  similar  'experi- 
ence to  that  of  the  Equitable, 

The  early  success  of  the  Equitable  Society  of  London 
was  very  largely  due  to  its  having  had  Dr.  Richard  Price, 
the  compiler  of  the  Northampton  Table,  and  William 
Morgan,  his  nephew,  in  its  service  as  actuaries* 

The  Amicable  and  Equitable  of  London  may  safely 
be  styled  the  keystone  of  the  great  institution  of  Life  In* 
surance.  The  managers  of  these  concerns  had  to  wrestle 
with  many  intricate  and  perplexing  problems  of  principle 
and  practice.  Their  conclusions  and  procedure  afforded 
valuable  precedents  to  later  companies  in  the  earlier 
period  of  the  business. 

In  the  half  century  following  the  introduction  of  Life 
Insurance  a  great  many  companies  were  floated.  Con* 
ducted  and  patronized  in  a  spirit  of  speculation,  a  large 
proportion  of  them  failed  through  reckless  management, 
and  not  a  few  owing  to  the  investment  of  their  funds  in 
the  South  Sea  Company  and  similar  evanescent  enter- 
prises. "Insurable  interest"  was  not  recognized  at  that 
time.  "Graveyard  risks"  were  imposed  on  the  compa- 
nies, and  not  infrequently  murders  were  committed  to 
create  claims.  Insurances  were  granted  for  one  year  on 
a  percentage  charge,  almost  regardless  of  age,  health, 
or  other  conditions.  No  reserves  were  provided,  and  the 
factor  of  interest  was  for  long  ignored.  A  gradual  im- 
provement of  these  careless  methods  and  haphazard  con- 
ditions came  to  pass,  beginning  at  about  the  time  of  the 
organization  of  the  Equitable  Society  of  London  in  1762. 
This  and  several  other  companies  which  were  established 
in  the  latter  part  of  the  eighteenth  century  are  operating 
on  a  sound  basis  today. 

Life  Insurance  in  America  began  after  the  mediaeval 
practice  of  a  syndicate  of  private  individuals  underwrit- 
ing the  life  of  a  certain  person  for  the  term  of  one  year, 
during  which  he  was  to  be  subjected  to  some  special 
hazard,  usually  a  long  sea  journey.  In  the  first  century 
and  a  half  of  the  colonial  period  this  was  the  only  form 


of  Life  Insurance  available.  The  first  American  institu- 
tion for  insuring  lives  grew  out  of  a  relief  fund  of  the 
Presbyterian  synods  of  New  York  and  Philadelphia.  In 
1759  a  charter  was  obtained  by  the  organization,  which 
was  not,  however,  authorized  to  do  a  general  business 
until  1875.  It  is  still  operating  under  the  name  of  the 
Presbyterian  Ministers'  Fund.  Unlike  the  experience  in 
England,  the  introduction  to  the  United  States  of  organ- 
ized Life  Insurance  was  not  followed  by  the  creation 
of  a  number  of  companies.  In  1859 — exactly  one  hun- 
dred years  after  the  establishment  of  the  first  life  office 
fn  America — only  fourteen  companies  reported  to  the 
New  York  Insurance  Department,  then  in  its  first  year. 
This  slow  growth,  whilst  attributable  in  large  measure 
to  ignorance  and  prejudice  on  the  part  of  the  public,  was 
in  no  small  degree  due  to  high  mortality  and  prevalence 
of  epidemic  diseases,  especially  in  the  South  and  West. 
These  conditions  seriously  restricted  the  operations  of 
American  companies  in  the  early  period  of  the  business. 

The  organization  of  the  Pennsylvania  Company  for 
Insurance  of  Lives  and  Granting  Annuities  in  1809, 
marked  the  beginning  of  Life  Insurance  upon  a  business 
basis  in  the  United  States.  This  concern  adopted  the 
policy  forms  and  premium  rates  used  by  the  best  British 
eompanies  which  had  been  writing  level  premium  insur- 
ance for  many  years  previous.  The  precedent  set  by  the 
Pennsylvania  Company  in  this  respect  was  a  fortunate 
one  because  the  policy  of  the  Presbyterian  Ministers' 
Fund  was  virtually  an  assessment  contract. 

The  earliest  American  Life  Insurance  corporations 
were  stock  companies  with  large  capital  and  generally 
authorized  to  do  a  trust  business.  A  common  form  of 
policy  was  for  one  year  at  rates  which,  for  age  41,  varied 
from  $17.80  to  $21.00  per  thousand.  One  of  these  com- 
panies, the  Girard  Life  &  Trust  Company  of  Philadel- 
phia, organized  in  1836,  introduced  the  plan  of  sharing 
profits  with  policyholders.  The  result  was  an  immediate 
demand  for  mutual  Life  Insurance  companies,  successful 
examples  of  which  were  found  in  the  Equitable  and 
others  of  London.  Between  1843,  the  year  in  which  the 
Mutual  Life  of  New  York  commenced  business,  and  1860, 
thirty-four  companies  were  organized  in  the  United 
States  to  do  a  Life  Insurance  business  on  a  purely  mutual 


plan,  or  one  providing  for  a  proportion  of  profits  to  be 
paid  to  policyholders.  In  the  same  period  the  insurance 
in  force  increased  from  $6,500,000  to  $160,000,000.  Con- 
trary to  expectations,  the  Civil  War  seems  to  have  exer- 
cised a  stimulating  effect  upon  the  Life  Insurance  busi- 
ness. At  the  close  of  the  year  1869  there  were  110  cor- 
porations engaged  in  it,  whilst  the  insurance  in  force 
amounted  to  approximately  $1,500,000,000. 

The  extraordinary  growth  of  the  business  in  the  quar- 
ter century  preceding  1870  was  mainly  due  to  reckless 
management  which  overlooked  the  necessity  of  adequate 
reserves,  distributed  extravagant  dividends  and  accepted 
notes  instead  of  cash  in  payment  of  premiums.  Few 
companies  were  in  the  hands  of  capable  executives.  The 
idea  had  prevailed  that  a  Life  Insurance  office  might  be 
successfully  conducted  without  technical  knowledge  or 
experience.  During  the  decade  preceding  1870  a  wave 
of  reckless  promotion,  similar  to  that  which  is  now  sub- 
siding, resulted  in  the  incorporation  of  scores  of  com- 
panies under  the  most  unpromising  conditions. 

Most  of  these  ill-begotten  concerns  were  short-lived. 
In  the  course  of  ten  years,  following  1870,  which  was  a 
period  marked  by  general  mismanagement  of  corpora- 
tions, no  fewer  than  71  Life  Insurance  companies  failed. 
The  immediate  consequences  to  the  business  were  nat- 
urally detrimental,  but  the  ultimate  effect  unquestionably 
favorable.  The  surviving  companies  took  the  lesson  to 
heart  and  instituted  reforms.  The  organization  of  new 
companies  was  checked,  not  a  single  one  entering  the 
business  during  twenty  years. 

The  fifteen  years  succeeding  1880  was  a  period  of 
great  prosperity  for  Life  Insurance,  at  the  end  of  which 
there  were  5,000,000  policies  in  force  in  the  United  States 
representing  a  total  amount  of  $12,000,000,000,  more  than 
eight  times  as  much  as  the  insurance  in  force  in  1879.  A 
brief  set-back  was  experienced,  owing  to  the  revelations 
of  the  Armstrong  Committee  of  the  New  York  Legisla- 
ture. Whilst  this  inquiry  disclosed  grave  abuses  in  con- 
nection with  a  few  of  the  largest  companies,  it  revealed 
conservative  management  and  faithful  trust  on  the  part 
of  the  great  majority,  and  revealed  the  inherent  strength 
and  soundness  of  the  institution  of  Life  Insurance. 

Long  before  this  time  the  practice  of  Life  Insurance 

7 


was  on  a  thoroughly  scientific  basis.  State  supervision 
and  the  passage  of  non-forfeiture  laws  had  inspired  pub- 
lic confidence.  The  Tontine  system  of  accumulating 
dividends,  whilst  the  prime  cause  of  the  chief  abuses 
associated  with  the  business,  was  one  of  the  most  potent 
factors  in  its  extension.  With  the  numerical  increase  of 
companies  the  pressure  of  competition  led  to  greatly  im- 
proved service  and  a  liberality  in  policy  contracts  which 
has,  in  some  respects,  transcended  the  bounds  of  conser- 
vatism. 

These  developments  had  the  effect  of  accelerating 
the  growth  of  Life  Insurance  in  America  at  a  marvelous 
rate.  There  is  now  in  force  in  this  country  upwards  of 
$24,600,000,000  of  legal  reserve  Life  Insurance,  exclusive 
of  that  issued  by  fraternal  societies  and  assessment  as- 
sociations. This  is  more  than  twice  the  amount  of  sim- 
ilar protection  carried  by  the  combined  peoples  of  Europe. 
Assets  held  to  meet  the  liabilities  under  this  vast  busi- 
ness aggregate  more  than  $5,500,000,000.  The  surplus 
funds,  including  capital,  approximate  $700,000,000.  In  the 
year  1916  the  companies  distributed  to  policyholders  and 
their  beneficiaries  upwards  of  $555,000,000.  The  firmness 
with  which  Life  Insurance  had  become  rooted  in  America 
was  proved  by  the  comparatively  slight  effect  upon  the 
business  by  the  disturbance  and  misapprehension  which 
was  created  in  the  public  mind  by  the  garbled  press 
reports  of  the  Armstrong  investigation  in  1905.  How- 
ever, the  condition  created  an  opportunity,  of  which 
shrewd  promoters  were  quick  to  avail  themselves.  By 
misrepresentation  of  the  profits  to  be  derived  from  the 
business,  and  by  appeal  to  sectional  pride  or  prejudice, 
solely  self-interested  speculators  floated  numerous  com- 
panies under  conditions  that  precluded  the  possibility  of 
success  in  any  but  a  few  cases.  Ten  years  ago  there  were 
112  old  line  companies  operating  in  the  United  States. 
There  are  now  about  225,  half  the  number  reporting  less 
than  $3,000,000  of  new  business  annually.  Each  year 
witnesses  the  disappearance  of  a  number  of  these  com- 
panies either  by  complete  failure  or  by  absorption  in 
stronger  concerns. 

The  history  of  Fraternal  and  Assessment  insurance  in 
America  will  be  treated  in  a  later  paper. 

8 


LIFE  INSURANCE  AS  AN  ECONOMIC  FACTOR 

With  the  enhancement  in  the  material  value  of  human 
life  and  the  complex  interdependence  of  the  members  of 
a  civilized  community,  Life  Insurance  became  a  well-nigh 
essential  economic  factor.  Without  its  conserving  and 
creating  agency  our  present  national  development  could 
not  have  been  attained.  Indeed,  it  is  not  too  much  to 
say,  that  if  the  40,000,000  or  more  Life  Insurance  policies 
carried  by  Americans  should  be  suddenly  cancelled  with- 
out compensation,  the  industrial  and  social  progress  of 
our  country  would  receive  a  more  severe  shock  than  could 
be  dealt  to  it  by  any  other  conceivable  calamity. 

The  consideration  of  Life  Insurance  in  its  economic 
aspect  opens  up  too  vast  a  field  for  extensive  exploration. 
I  shall  endeavor  to  convey  some  idea  of  its  character  and 
extent  in  a  few  brief  generalizations.  The  student  who 
may  desire  to  go  into  the  subject  more  deeply  is  directed 
to  the  following  sources  of  information.  (Insurance  Sci- 
ence and  Economics,  Hoffman ;  Proceedings  of  the  Asso- 
ciation of  Life  Insurance  Presidents;  Yale  Readings  in 
Insurance,  Life  volume;  American  Academy  of  Political 
and  Social  Science,  Insurance  volume.) 

Life  Insurance  is  fast  evolving  from  an  agency  for 
mere  personal  protection  to  a  social  and  economical  insti- 
tution of  the  most  widespread  influence.  Evidences  of 
this  are  found  in  the  various  government  insurance  enter- 
prises, in  the  different  applications  of  group  insurance, 
in  business  or  commercial  insurance,  and  in  insurance 
designed  to  furnish  endowments  to  semi-public  institu- 
tions. Recognition  of  these  constantly  broadening  func- 
tions, with  their  vastly  important  effects,  has  led  to  the 
establishment  of  Life  Insurance  courses  in  seventy  Amer- 
ican universities  and  colleges.  The  resultant  increase  in 
knowledge  and  understanding  must  react  with  beneficial 
influence  upon  the  business  of  Life  Insurance. 

Life  Insurance  enables  a  man  to  fulfill  those  funda- 
mental obligations  to  his  kin  and  to  society  which  would 
otherwise  fall  upon  the  state.  Life  Insurance,  by  enforc- 
ing thrift,  operates  towards  the  decrease  of  indigence. 
Life  Insurance  elevates  the  standard  of  living  and  conse- 
quently promotes  morality.  Life  Insurance  provides 
sustenance  and  the  means  of  education  to  the  young, 
thereby  militating  against  vice  and  degeneracy.  Statis- 


tical  records,  as  well  as  investigations  in  orphan  asylums 
and  reformatories,  strongly  support  these  conclusions. 

Life  Insurance  has  always  met  with  greatest  appreci- 
ation among  the  poorer  classes.  The  holders  of  industrial 
policies  in  America  number  tens  of  millions.  By  far  the 
largest  amount  of  assessment  and  fraternal  insurance  is 
carried,  if  not  by  the  laboring  classes,  by  men  of  little 
more  monetary  means.  The  industrial  insurance  in  force 
exceeds  $4,770,000,000.  Every  claim  paid  under  this 
insurance  represents  substantially  the  relief  of  tax-payers 
from  the  expense  of  a  burial.  Great  as  it  must  be,  we 
cannot  estimate  the  moral  effect  upon  the  industrial 
classes  of  the  self-sacrifice,  independence  and  foresight 
involved  by  this  modest  protection. 

Year  by  year  the  payments  under  "ordinary"  policies 
enable  an  army  of  children  to  remain  at  school  who  other- 
wise would  have  been  obliged  to  go  upon  the  streets 
or  into  factories,  with  the  result  of  impairing  their  health, 
requiring  them  to  grow  up  in  ignorance  and,  perhaps, 
leading  them  into  lives  of  crime.  The  value  of  Life  Insur- 
ance to  the  State  and  to  the  social  body  in  this  respect 
can  only  be  faintly  conjectured.  A  highly  important 
effect  of  Life  Insurance,  but  one  which  cannot  be  meas- 
ured any  more  accurately,  is  its  inducement  to  habits  of 
thrift,  self-denial  and  accomplishment  of  duty.  Millions 
of  men  make  their  first  savings  in  this  way  and  extend 
them  in  consequence. 

Life  Insurance  is  one  of  the  most  effective,  equitable 
and  beneficial  agencies  for  the  re-distribution  of  wealth. 
In  the  operation  of  distributing  the  burden  over  many 
shoulders  and  spreading  the  benefits  upon  many  heads 
it  performs  a  number  of  economic  functions  that  are 
hardly  suspected  by  the  average  layman.  The  yearly 
income  and  outlay  of  the  legal  reserve  companies  aggre- 
gate more  than  $1,700,000,000,  or  about  three-fourths  of 
all  the  currency  in  the  United  States.  These  many  mill- 
ions are  constantly  flowing  into  the  insurance  offices  in 
driblets  and  as  constantly  streaming  out  in  larger  units. 

The  funds  of  Life  Insurance  companies,  which  have 
been  aptly  termed  "the  people's  investments,"  are  placed, 
under  the  regulations  of  the  various  States'  insurance 
departments,  in  bonds  of  the  best  character,  real  estate 
mortgages,  farm  loans  and  other  securities,  all  of  which 

10 


are  connected  with  public  improvements  and  private  en- 
terprises. Life  Insurance  money  buys  the  State  and  mu- 
nicipal bonds  which  provide  for  the  erection  of  school 
houses,  the  construction  of  roads  and  other  public  works 
that  necessitate  the  extensive  employment  of  labor.  It 
erects  the  city  sky-scraper,  finances  the  trolley  line  and 
the  telephone  system.  It  furnishes  the  means  of  im- 
proving the  ranch  and  establishing  the  irrigating  plant. 

In  short,  Life  Insurance  funds  are  the  vital  element 
in  safe  and  profitable  enterprises  of  all  kinds.  They  are 
the  investments  of  the  masses  in  fields  which  they  could 
not  enter  as  individuals.  The  money  paid  to  the  com- 
panies in  premiums  is  circulated  where  it  will  do  the  most 
good  to  the  individual  contributor  and  to  the  community 
at  large. 

Commercial  Life  Insurance,  which,  in  preserving  the 
business,  protects  the  home,  is  a  rapidly  growing  influ- 
ence on  the  stability  of  our  business  affairs.  Every  year 
millions  are  lent  by  insurance  companies  on  the  security 
of  commercial  policies,  and  there  can  be  no  doubt  but 
that  thousands  of  concerns  are  saved  from  serious  em- 
barrassment, if  not  actual  bankruptcy,  by  this  means. 

The  latter-day  Life  Insurance  company  entertains  a 
view  of  its  obligations  and  the  scope  of  its  utility  which 
was  undreamed  of  twenty-five  years  ago.  Progressive 
executives  and  directors,  with  due  regard  to  the  reactive 
effects,  are  extending  to  the  patrons  of  their  companies 
and  the  public  at  large,  services  which  pass  far  beyond 
the  bounds  of  the  benefits  contemplated  in  their  charters. 
Some  companies  are  making  notable  contributions  to 
the  conservation  of  life  and  the  promotion  of  hygiene. 
The  organized  efforts  in  this  direction  represent  a  move- 
ment which,  though  only  in  its  infancy,  has  already  pro- 
duced widely  beneficial  effects,  and  promises  to  become 
a  potent  factor  in  our  social  welfare. 


FORM    S-12O  B 

11 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

I 

1.  What  early  associations  may  be  termed    "the   fore- 
runners" of  modern  Life  Insurance? 

The  Burial  Clubs  and  Friendly  Societies  which  suc- 
ceeded the  guilds,  after  their  suppression  in  the  reign 
of  Henry  the  Eighth. 

2.  What  was  the  first  Mutual  Life  Insurance  Company 
and  when  was  it  organized? 

The  Amicable  Society  for  a  Perpetual  Assurance 
Office,  organized  in  1706. 

3.  What  was  the  earliest  form  of  Life  Insurance  policy? 

One  year  Term. 

4.  To  what  may  be  attributed  the  slow  early  growth 
of  Life  Insurance  in  America? 

Ignorance  and  prejudice  on  the  part  of  the  public, 
high  mortality  and  prevalence  of  epidemics  in  many 
sections  of  the  country. 

5.  What    created    the    demand    for    mutual    companies 
in  America? 

The  payment  of  dividends  to  policyholders  by  stock 
companies,  particularly  the  Girard  Life  &  Trust 
Company  of  Philadelphia* 

6.  What  effect  did  the  Civil  War  appear  to   have  on 
Life  Insurance  and  how  was  it  indicated? 


A  stimulating  effect,  as  indicated  by  the  presence  in 
America  of  110  companies  at  the  close  of  the  year 
1869  with  insurance  in  force  amounting  to  $1,500,- 
000,000. 

7.  State  a  few  of  the  effects  wrought  by  Life  Insurance 
as  a  social  factor. 

It  enables  a  man  to  fulfil  obligations  to  his  dependents 
which  would  otherwise  fall  upon  the  State.  It  en- 
forces thrift^  elevates  the  standard  of  living,  provides 
means  of  education  and  generally  operates  against 
poverty. 

8.  In  what  manner  does  the  investment  of  Life  Insur- 
ance funds  conduce  to  the  welfare  of  the  business 

and  wage-earning  elements  of  the  community? 

By  affording  the  means  of  promoting  the  greatest 
variety  of  public  and  business  enterprises  which  open 
wide  fields  for  the  employment  of  labor. 

9.  In  what  respect  do  Life  Insurance  investments  place 
the  policyholder   of  small   means   on   a  parity   with 
the  man  of  wealth? 

By  entering  fields  of  investment  which  open  only  to 
capital. 

1  0.     Why  may  Commercial  Life  Insurance  be  considered 
a  factor  in  domestic  conservation? 

Because  the  preservation  of  the  business  must  pro- 
tect the  home. 


QUESTIONS 

i 

1.  What  early  associations  may  be  termed   "the  fore- 
runners" of  modern  Life  Insurance  companies. 

2.  What  was  the  first  Mutual  Life  Insurance  company 
and  when  was  it  organized? 

3.  What  was  the  earliest  form  of  Life  Insurance  policy? 

4.  To  what  may  be  attributed  the  slow  early  growth 
of  Life  Insurance  in  America? 

5.  What   created   the   demand    for  mutual   companies 
in  America? 

6.  What  effect  did  the  Civil  War  appear  to  have  on 
Life  Insurance  and  how  was  it  indicated? 

7.  State  a  few  of  the  effects  wrought  by  Life  Insurance 
as  a  social  factor. 

8.  In  what  manner  does  the  investment  of  Life  Insur- 
ance funds  conduce  to  the  welfare  of  the  business 
and  wage-earning  elements  of  the  community? 

9.  In  what  respect  do  Life  Insurance  investments  place 
the  policyholder  of  small  means  on  a  parity  with 
the  man  of  wealth? 

1 0.      Why  may  Commercial  Life  Insurance  be  considered 
a  factor  in  domestic  conservation? 


1 1 

STfjeorp  of  &t*k  anfc  Jffletfjote 
of  Selection 

BY  FORBES  LINDSAY 

"Insurance,  reduced  to  its  simplest  terms,  means  the 
application  of  the  principle  of  association  to  the  equali- 
zation of  losses  resulting  from  the  inherent  uncertainty 
in  human  affairs."  In  the  language  of  the  Select  Com- 
mittee on  Friendly  Societies,  1825,  "wherever  there  is  a 
contingency,  the  cheapest  way  of  providing  against  it 
is  by  uniting  with  others,  so  that  each  man  may  subject 
himself  to  a  small  present  privation  in  order  that  no  man 
may  be  subjected  to  a  great  future  loss." 

From  the  earliest  days  of  organized  society,  effort  has 
been  directed  toward  eliminating  or  mitigating  the  con- 
sequences of  the  many  casual  and  hidden  hazards  to 
which  human  beings  are  subject.  Insurance  has  proved 
to  be  the  most  practical  and  effective  agency  for  the  at- 
tainment of  the  object.  In  its  modern  development  it 
furnishes  a  scientific  method  of  providing  indemnity  for 
the  losses  entailed  by  a  great  variety  of  unforeseeable  oc- 
currences, and  its  application  is  now  extended  to  cover 
almost  every  adverse  contingency  to  which  the  business 
or  personal  interests  of  the  individual  are  exposed. 

Ignoring  the  philosophic  discursions  on  the  abstract 
nature  of  chance,  we  shall  employ  the  word  in  the  sense 
which  obtains  among  actuaries,  that  is,  to  mean  the  de- 
gree of  probability  of  a  future  event.  This  probability, 
in  so  far  as  it  enters  into  the  mathematics  of  Life  Insur- 
ance, is  mainly  determined  by  the  experience  of  the  past, 
and  with  the  passage  of  time  is  constantly  approaching  a 
closer  approximation  to  precision. 

Chance  "may  vary  all  the  way  from  absolute  certainty 
that  an  event  will  not  occur,  through  the  different  degrees 
of  probability,  to  absolute  certainty  that  it  will  occur." 
Obviously  the  degree  of  uncertainty  is  greatest  midway 
between  these  extremes  of  absolute  certainty.  That  is  to 
say,  when  the  chance  of  an  event  happening  is  exactly 
equal  to  the  chance  of  its  not  happening,  the  uncertainty 

Copyrighted  1916  and  1917  by  The  Pacific  Mutual  Life  Insurance  Company  of  California 


of  its  occurrence  is  greatest.  With  the  increase  of  the 
chance  in  either  direction  the  degree  of  uncertainty  neces- 
sarily diminishes. 

When  an  insurance  company  places  a  policy  on  the 
life  of  an  individual,  the  assumption  of  chance  on  its  part 
is  technically  termed  a  "risk,"  the  assured  is  referred  to 
as  a  "risk"  and  the  sum  for  which  he  is  insured  as  "the 
amount  at  risk." 

It  is  important  that  we  should  clearly  understand  the 
difference  in  character  between  a  risk  in  the  ordinary 
sense  and  a  Life  Insurance  risk.  The  former  is  generally 
indefinite  and  immeasurable;  the  latter  is  practically  al- 
ways the  reverse.  The  actuary  deals  with  precise  data 
and  calculable  chances.  But  in  order  to  do  this  he  must 
be  able  to  secure  the  operation  of  the  Law  of  Averages 
upon  his  risks. 

Our  mortality  tables  tell  us  that  about  50  men  of  100 
aged  91  will  die  in  the  ensuing  year.  Each  has  an  even 
chance  of  death  as  a  member  of  the  group.  As  a  segre- 
gated individual  his  chance  becomes  absolutely  uncertain. 
There  is  no  scientific  basis  for  calculating  it.  The  only 
safe  premium  for  insuring  him  for  $1,000  would  be  that 
amount  discounted  by  a  year's  interest.  He  is  a  risk  in 
the  conventional  sense.  The  actuary  might,  however,  in- 
sure the  entire  group  for  $1,000  each  at  a  premium  of  a 
little  less  than  $500.  They  would  be  risks  in  the  insur- 
ance sense  and  all  the  chance  involved  in  the  transaction 
would  fall  upon  the  insured. 

There  is  nothing  less  certain  than  the  duration  of  a 
single  life,  and  few  things  more  certain  than  the  average 
duration  of  life  in  a  group.  We  do  not  know  which  par- 
ticular persons  of  the  group  will  die  in  a  given  year,  but 
we  have  practically  accurate  knowledge  of  the  number 
who  will  do  so.  That  is  to  say,  the  life  of  any  individual 
is  an  uncertain  quantity,  but  the  life  of  the  average  mem- 
ber of  an  insured  group  is  subject  to  precise  mathematical 
estimation.  There  is  the  greatest  possible  difference  be- 
tween insuring  a  single  life  and  insuring  the  lives  of  a 
group.  The  former  transaction  is  a  wager,  pure  and 
simple,  and  such  was  the  nature  of  all  the  earliest  Life 
Insurance  operations.  Indeed,  the  business  was  com- 
monly looked  upon  as  a  sort  of  beneficent  gambling  un- 
til after  the  middle  of  the  nineteenth  century.  A  New 

14 


York  statute  of  about  the  year  1834  specifically  prohib- 
ited a  number  of  different  forms  of  gambling,  and  in 
parenthesis  excepted  Life  Insurance. 

The  ethical  distinction  between  gambling  and  insur- 
ance was  pointed  out  by  such  early  writers  as  Dymond 
and  Wayland.  This  aspect  of  Life  Insurance  has  grad- 
ually grown  in  appreciation  until  now  it  is  universally 
considered  immoral  and  dishonest  in  a  man  with  depend- 
ents to  fail  to  carry  insurance. 

Life  Insurance  is  in  many  respects  the  antithesis  of 
gambling.  The  essence  of  the  latter  is  an  impredicable 
chance.  The  fundamental  purpose  of  the  former  is  the 
equalization  of  this  element  in  human  affairs.  It  might 
be  said  with  some  show  of  reason  that  from  the  view- 
point of  the  insured  a  Life  Insurance  transaction,  like  a 
wager,  is  invested  with  a  strong  element  of  chance. 
Whilst  this  is  true — otherwise  the  raison  d'etre  of  insur- 
ance would  be  lacking — there  is,  even  in  this  regard,  a 
marked  contrast.  The  gambler  places  his  stake  with  the 
possibility  of  entire  loss.  The  insured  pays  his  premium 
with  the  certainty  of  definite  return.  The  only  question 
is  when.  In  other  words,  Life  Insurance  deals  with  an 
event  which  is  positively  sure  to  occur,  although  the  time 
of  its  occurence  cannot  be  foretold.  All  insurance  is 
founded  upon  the  laws  of  probability,  but,  because  of  this 
element  of  certainty,  which  it  alone  enjoys,  life  under- 
writing is  the  surest  basis  for  contracts  entailing  the 
certain  payment  of  money. 

The  word  "probability,"  in  vulgar  parlance,  signifies 
that  which  is  likely  to  occur  in  the  opinion  of  the  speaker, 
and  rarely  with  any  scientific  knowledge  of  its  likelihood. 
In  Life  Insurance  terminology  "probability"  signifies  a 
degree  of  chance  closely  approximating  certainty,  based 
on  extensive  past  experience,  the  element  of  precision 
being  introduced  by  the  influence  of  the  "Law  of  Av- 
erages." 

Here,  again,  is  a  word  which  in  popular  usage  has  a 
very  different  meaning  from  that  attached  to  it  by  an 
actuary.  The  term  "average"  is  employed  in  ordinary 
speech  to  denote  something  which  is  commonplace — not 
extraordinary.  This,  in  so  far  as  it  involves  the  idea  of 
normality,  conforms  with  the  actuarial  understanding  of 
the  word,  but  a  vital  divergence  occurs  with  its  applica- 

15 


tion  to  an  individual  person  or  a  single  event.  The  most 
erroneous  use  of  the  term,  as  Hoffman  points  out,  (Law 
of  Average,  in  Insurance  Science  and  Economics)  is 
"when  it  is  employed  to  forecast  individual  occurences, 
or  to  verify  individual  predictions  of  individual  events 
which,  if  realized  at  all  under  such  conditions,  would  be  a 
mere  matter  of  true  accident,  or  pure  chance.  It  is,  in 
fact,  the  very  opposite  of  the  function  of  the  average  to 
forecast  any  particular  event,  or  the  occurence  of  any 
particular  contingency.  The  proper  use  of  the  term  is 
limited  to  the  forecasting  of  normal  events,  in  the  order 
of  normal  frequency." 

SELECTION  OF  RISKS 

The  established  mortality  tables  give  us  the  probabiil- 
ties  of  death  and  the  expectation  of  life,  at  different  ages, 
of  the  members  of  a  large  group,  under  predicated  con- 
ditions. Provided  similar  conditions  obtain,  these  tables 
can  be  relied  upon  to  indicate  average  occurrence,  with 
no  great  variations.  By  creating  modifications  of  the 
conditions  a.  corresponding  modification  of  the  mortality 
in  favor  of  the  insurer  is  secured.  If  a  company  exercises 
due  care  to  keep  its  aggregate  risks  at  the  standard  con- 
templated by  the  tables,  makes  judicious  investment  of 
its  funds  and  earns  the  rate  of  interest  on  which  its  op- 
erations are  based,  it  takes  no  "risk"  whatever  in  the 
ordinary  acceptance  of  the  word. 

If  it  were  possible  to  insure  the  entire  adult  popula- 
tion of  a  numerous  community,  or  a  representative  por- 
tion of  it  taken  without  discrimination,  it  could  be  safely 
done  by  mere  application  of  statistics  at  our  command. 
But  since  the  company  is  confined  to  risks  that  offer 
themselves,  many  considerations  of  a  non-mathematical 
character  enter  into  the  matter.  Naturally,  the  least  de- 
sirable risks  are  the  most  desirous  of  obtaining  insurance. 
In  order  to  avoid  undue  discrimination  against  itself  and 
in  order  to  procure  such  a  body  of  risks  as  will  conform 
in  death  rate  to  the  established  mortality  tables,  it  is 
necessary  to  scrutinize  and  carefully  consider  every  pro- 
posal for  Life  Insurance  made  to  the  office.  This  process 
of  scrutiny  and  examination  is  termed  "selection." 

"Selection"  in  Life  Insurance  is  ordinarily  understood 
to  signify  the  acceptance  and  rejection  of  applicants  fol- 

16 


lowing  medical  examination.  The  scope  of  selection  is, 
however,  much  wider  than  this,  and  embraces  the  regula- 
tions of  companies  which  exclude  certain  classes  alto- 
gether and  restrict  others  to  particular  forms  of  insur- 
ance. In  the  category  of  methods  for  preventing  adverse 
selection  fall  clauses  of  the  policy  contract  exempting 
the  company  from  liability  under  certain  conditions.  The 
most  common  of  these  is  the  suicide  clause. 

Selection  is  also  exercised  by  refraining  from  business 
in  unfavorable  localities  or  declining  to  entertain  appli- 
cations from  members  of  certain  communities.  Whilst 
extensive  sections  of  the  United  States  were  thus  pre- 
cluded during  the  early  period  of  the  business,  nowadays 
this  form  of  discrimination  is  usually  temporary  and  em- 
ployed to  guard  against  the  effects  of  transient  condi- 
tions, such  as  those  arising  from  the  present  war. 

"Inspection"  of  proposed  risks,  that  is,  enquiry  about 
them  through  some  expert  agency,  is  a  valuable  aid  to 
selection,  especially  in  regard  to  estimating  the  moral 
hazard.  Soliciting  agents  frequently  perform  a  service 
in  the  nature  of  selection  when  they  abstain  from  pre- 
senting to  their  companies  the  applications  of  undesirable 
persons,  or  when  they  voluntarily  submit  information 
which  might  not  be  elicited  by  the  examiner. 

All  these  methods  of  selection  have  the  common  ob- 
ject of  securing  as  nearly  as  possible  a  homogeneous 
group  of  risks.  The  immediate  result,  however,  is  the  in- 
troduction of  extra-favorable  risks.  "Select  lives,"  as 
those  recently  accepted  are  termed,  enjoy  a  considerably 
lower  mortality  than  that  called  for  by  the  tables  at  their 
respective  ages.  For  example,  the  death-rate  amongst 
select  lives  at  the  age  of  40  is,  at  the  outset,  less  than  5 
per  thousand.  At  the  same  age,  the  death  rate  among 
persons  who  have  been  insured  for  five  or  more  years 
is  about  10  per  thousand.  The  saving  from  this  source 
is  called  the  "benefit  of  selection."  The  influence  of  se- 
lection upon  the  death-rate  gradually  wanes  and  totally 
expires  in  about  five  years.  The  mortality  tables  in  com- 
mon use  by  Life  Insurance  companies  deal  with  lives 
which  have  been  insured  for  longer  than  five  years,  and 
for  that  reason  are  styled  "ultimate  tables." 

It  must  be  understood  that  self-selection,  as  represent- 
ing the  volition  of  the  applicant,  involves  a  sinister  ele- 

17 


ment  which  is  constantly  operating  against  a  company 
and  to  protect  itself  from  which  vigilance  is  necessary, 
"Bad  risks"  commonly  resort  to  extraordinary  and  some- 
times dishonest  means,  to  elude  the  tests  of  the  company., 
Co-operation  of  life  offices,  which  exchange  information 
respecting  impaired  lives,  is  an  effective  measure  of  pro- 
tection. Withal,  the  adverse  influence  of  self-selection 
is  generally  felt  by  Life  Insurance  companies  to  some 
extent,  as  indicated  by  the  almost  universally  higher  mor- 
tality among  holders  of  term  and  whole  life  policies  than 
among  those  carrying  endowment  insurance. 

Whilst  the  power  of  selection  ceases  with  the  com- 
pany when  the  applicant  is  accepted  (except  in  case  of 
accident  and  sickness  insurance,  which  all  companies 
retain  the  right  to  terminate  at  will),  the  insured  may 
exercise  a  species  of  selection  at  any  time  by  canceling 
his  contract.  It  was  generally  believed  that  this  privilege 
of  withdrawal  would  operate  to  the  disadvantage  of  the 
company  by  the  discontinuance  of  healthy  lives  and  the 
persistence  of  impaired  risks.  This  conclusion  is  not 
supported  by  the  results  of  recent  investigation,  from 
which  it  appears  that  lapse  is  comparatively  rarely  an 
outcome  of  deliberate  calculation,  but  is  much  more  fre- 
quently the  consequence  of  financial  embarrassment  or  a 
desire  for  some  form  of  selfish  indulgence.  It  is  a  well- 
known  fact  that  mortality  among  shiftless  and  unsuccess- 
ful men  is  markedly  heavier  than  among  the  thrifty  and 
prosperous.  Contrary  to  expectation,  then,  lapses  in 
legal  reserve  companies  have  a  somewhat  favorable  effect 
on  the  mortality. 

In  the  foregoing  discussion  we  considered  "average 
risks"  which,  although  they  vary  in  degree  of  accepta- 
bility, are  all  such  as  the  company  can  conservatively 
insure  at  its  regular  rates  and  under  its  regular  policy 
forms,  with  occasional  modification  of  the  conditions  of 
the  latter.  In  case  physical  condition,  family  history,  or 
occupation  impel  the  company  to  decline  the  insurance 
upon  an  applicant  at  any  premium  rate  less  than  that  of 
ten-year  endowment,  the  policy  will  be  issued  at  the  reg- 
ular rate  for  that  form,  but  the  insured  may  be  deprived 
of  the  usual  extended-insurance  option,  which  permits  of 
the  continuance  of  the  protection,  without  premium  pay- 

18 


ments,  on  the  basis  of  term  insurance,  as  will  be  explained 
hereafter. 

These  risks,  despite  the  variation  in  quality,  all  con- 
form  to  the  general  standard  contemplated  by  the  mortal- 
ity tables.  There  is  a  class  of  lives  which  cannot  be 
safely  insured  at  the  tabular  mortality  charges,  but  in 
which  cases  the  extra  hazard  is  of  such  a  character  that 
a  conservative  estimate  of  it  may  be  made  and  an  equit- 
able compensation  for  it  determined.  Such  lives  are 
termed  "under-average"  or  "sub-standard."  This  kind 
of  risks  is  underwritten  by  but  few  companies,  which 
adopt  four  different  methods  of  adjustment,  as  follows: 
1.  The  Lien  System.  A  lien  is  placed  upon  the  face  of 
the  policy,  reducible  yearly  by  a  certain  amount,  gener- 
ally that  of  the  premium  paid.  2.  The  Extra  Premium 
Plan,  by  which  the  regular  rate  is  increased  to  a  fixed 
amount.  3.  The  Advanced  Age  Plan.  In  this  case  the 
insured  is  charged  the  regular  premium  for  an  age  in 
advance  of  his  own.  4.  The  Special  Dividend  Plan. 
Under  this  system  an  ordinary  policy  is  issued,  but  the 
insured  is  placed  in  a  special  class  of  similar  risks,  and 
the  dividends  paid  are  determined  by  the  mortality  ex- 
perience of  that  class. 

So  far  as  the  insured  is  concerned,  each  of  these  sev- 
eral methods  has  one  of  two  distinct  effects,  i.  e.,  the 
reduction  of  the  indemnity  in  the  event  of  his  death  be- 
fore the  expiration  of  the  lien,  or  extra  cost  to  him  of 
the  protection.  The  Special  Dividend  Plan  has  the  latter 
effect,  because  practically  all  participating  insurance  now 
provides  for  annual  distribution  of  dividends  which  may 
be  applied  on  premium  payments. 

THE  PHYSICAL  HAZARD 

In  no  other  branch  of  the  Life  Insurance  business  is 
the  division  of  responsibility  and  the  co-operation  of  dif- 
ferent departments  of  a  company  so  great  as  in  the  selec- 
tion of  risks.  The  medical  "director"  is  actually  chief 
adviser  in  this  matter.  His  action  is  rarely  arbitrary  and 
then  only  in  the  direction  of  declination. 

Many  of  the  factors  which  affect  the   consideration 
of  an  application  are  not  at  all  of  a  medical  nature.    There 
are  non-technical  questions  which  can  best  be  answered  • 
by  an  executive  officer.     For  example,  a  man  who  has 

19 


twice  been  through  the  bankruptcy  court  and  is  starting 
a  new  commercial  enterprise,  applies  for  a  large  amount 
of  insurance.  The  business  experience  and  acumen  of 
the  executive  department  must  be  relied  upon  to  estimate 
the  risk.  Again,  the  knowledge  of  diseases  peculiar  to  the 
sex  might  lead  the  medical  director  to  consider  women 
worse  risks  than  men  if  the  actuary,  from  his  statistical 
resources,  could  not  show  that  there  are  counterbalanc- 
ing conditions  that  make  the  general  male  and  female 
hazards  about  equal.  The  degrees  of  risk  attaching  to 
occupation  are  frequently  non-medical  questions,  deter- 
minable  only  by  reference  to  records  of  accidents. 

The  closest  relation  exists  between  the  work  of  the 
medical  and  actuarial  departments.  Statistics  compiled 
by  the  former  officer  would  be  practically  worthless, 
would  have  no  business  significance, — except  for  the  in- 
terpretation given  them  by  the  actuary.  Consequently, 
medical  directors  and  actuaries  have  always  pooled  the 
tabulated  results  of  their  experiences  and  worked  in 
conjunction.  One  of  the  most  valuable  contributions  to 
Life  Insurance  knowledge  is  represented  by  the  recently 
published  Medico-Actuarial  Reports  of  an  exhaustive  in- 
vestigation covering  more  than  2,000,000  of  insured  Jives. 
In  the  following  brief  survey  of  the  chief  causes  of  re- 
jections the  data  furnished  by  these  reports  is  the  author- 
ity for  most  statements. 

The  Use  of  Alcohol.  The  detrimental  effect  of  al- 
cohol on  longevity  has  long  been  recognized  in  the  busi- 
ness and  it  is  accentuated  by  the  recent  findings.  The 
free  use  of  alcoholic  stimulants  lowers  vitality,  induces 
many  forms  of  fatal  disease,  tends  to  moral  deterioration 
and  is  the  direct  cause  of  numerous  accidental  deaths. 

The  United  Kingdom  Temperance  and  General  Prov- 
ident Institution  of  London  divides  its  business  into  the 
Temperance  Section  and  the  General  Section.  Carefully 
compiled  statistics  covering  a  period  of  more  than  half 
a  century  indicate  that  among  the  non-abstainers,  the 
deaths  were  100  per  cent  of  the  expected,  whilst  in  the 
other  class  they  were  no  more  than  74  per  cent,  of  the  tab- 
ular computation.  The  Medico-Actuarial  Report,  deal- 
ing with  an  entirely  different  set  of  exposures,  reaches  a 
practically  similar  conclusion. 

The   greatest   difficulty    in   medical   examinations   is 

20 


found  in  eliciting  from  applicants  satisfactory  informa- 
tion regarding  alcoholic  excess  and  venereal  complaints. 
True  and  full  replies  to  the  examiners'  questions  are 
rarely  given  in  cases  where  these  impairments  exist. 
The  habitually  excessive  drinker  is  irregular  in  his  con- 
sumption of  liquor,  keeps  no  account  and  invariably  un- 
derestimates it.  Every  man  who  applies  for  Life  Insur- 
ance considers  himself  "moderate"  or  "temperate"  in  the 
use  of  alcohol  and  it  is  a  matter  which  does  not  admit 
of  a  standard  which  would  have  general  application. 
What  might  not  be  considered  excessive  in  a  man  of  45, 
would  be  in  one  of  25.  At  young  ages  a  fixed  habit 
in  the  consumption  of  alcohol,  even  though  the  daily 
amount  be  small,  renders  the  case  doubtful,  because  of 
the  cumulative  effect  of  drinking. 

In  this  connection  there  is  greater  scope  than  in  any 
other  for  primary  selection  by  the  agent.  The  examiner 
will  sometimes  have  a  personal  knowledge  of  the  appli- 
cant's habits  in  this  respect,  but  persons  whom  it  is 
most  desirable  to  reject  will  frequently  avoid  being  ex- 
amined by  physicians  who  have  such  advantage,  and  as 
a  matter  of  fact,  companies  prefer  that  an  applicant  be 
not  examined  by  his  family  physician  or  one  intimately 
acquainted  with  him.  This  to  avoid  the  natural  predis- 
position in  his  favor  which  might  be  expected  in  such 
cases.  The  solicitor  is  in  a  better  position  than  anyone 
else  to  make  enquiry  respecting  an  individual's  practice 
in  the  use  of  alcohol  and  the  company  has  a  right  to 
expect  of  him  honest  and  diligent  effort  in  the  matter. 

Tuberculosis.  Increased  knowledge  of  preventive 
treatment,  improved  sanitation  and  education  of  the 
masses  have  effected  a  marked  decrease  in  the  spread 
of  infection  and  in  mortality  from  this  cause.  As  a  conse- 
quence, a  family  history  tainted  with  a  tubercular  record 
is  no  longer  a  decisive  bar  to  insurance.  In  fact,  un- 
healthful  environment  and  exposure  to  infection  are  now- 
a-days  deemed  more  serious  considerations  than  the  in- 
fluence of  heredity.  Provided  an  applicant  of  mature 
age  and  normal  weight,  living  in  favorable  surroundings, 
has  no  other  disqualification  than  one  or  two  cases  of  tu- 
berculosis in  his  family,  most  companies  will  accept  him. 
Of  course,  if  these  cases  have  been  of  recent  occurrence 

21 


and  the  applicant  has  been  living  in  contact  with  them, 
the  conditions  put  another  aspect  on  the  question. 

When  there  is  a  history  of  tuberculosis  and  the  ap- 
plicant is  underweight,  has  experienced  blood-spitting, 
or  exhibits  any  sinister  tendencies,  his  is  a  sub-standard 
risk  at  the  best. 

Pleurisy.  This  is  a  more  serious  impairment  than 
it  is  generally  understood  to  be/  Unquestionable  author- 
ities maintain  that  a  great  majority  of  pleurisies  are 
tubercular.  Investigation  indicates  that  where  there  has 
been  one  attack  within  five  years  of  application  the 
death  rate  is  146  per  cent,  of  the  expected,  between  five 
and  ten  years  113  per  cent,  and  over  ten  years  92  per  cent. 
The  hazard  is  increased  by  underweight  and  a  bad  en- 
vironment. 

Sugar  and  Albumen.  The  Report  shows  a  lower 
mortality  than  might  have  been  expected  in  connection 
with  these  impairments,  but  it  must  be  borne  in  mind 
that  companies  have  been  very  rigorous  in  the  rejection 
of  applicants  whose  urine  disclosed  the  presence  of  sugar 
or  albumen  and  the  figures  are  doubtless  materially  af- 
fected by  this  fact.  In  recent  years  greater  leniency  has 
prevailed  and  an  idiosyncrasy,  not  infrequent  among 
young  men,  is  recognized  where  the  subject's  urine  occa- 
sionally exhibits  traces  of  albumen  without  the  accom- 
paniment of  underweight  or  any  other  indication  of  phy- 
sical impairment.  The  discovery  of  casts  under  the  mi- 
croscope removes  the  applicant  from  standard  classifica- 
tion and  probably  entirely  precludes  him  from  insurance. 

In  order  to  accept  any  case  exhibiting  sugar  or  albu- 
men the  company  will  need  to  extend  its  investigation 
over  a  sufficiently  long  period  to  ascertain  without  ques- 
tion that  the  condition  is  a  transitory  one. 

Abnormal  Weight.  As  indicators  of  disease  and 
precursors  of  lesions  the  conditions  of  underweight  and 
overweight  are  of  grave  import.  The  existence  of  either 
condition  will  always  prompt  the  medical  director  to 
make  a  close  scrutiny  of  the  examination  and  family  his- 
tory of  the  applicant. 

Underweight  greatly  increases  the  mortality  at 
younger  ages,  with  a  progressive  decline  in  the  death 
rate  associated  with  this  condition  as  the  age  at  entry 
or  date  of  insurance  advances.  Thus,  25  to  30  pounds 

22 


below  standard  at  age  20  to  24  is  accompanied  by  a  mor- 
tality of  127  per  cent.,  whilst  among  entrants  from  35 
to  39  it  is  nearly  normal,  whereas  the  mortality  of  under- 
weights between  44  and  63  appears  from  the  Report  to 
be  even  better  than  among  those  of  average  weight. 

The  reverse  of  this  is  true  with  regard  to  overweights. 
Young  overweights  show  an  only  slightly  unfavorable 
mortality,  whilst  at  the  older  ages  the  results  are  strik- 
ingly bad.  Overweights  between  35  and  45  pounds  at 
ages  of  entry  20  to  24  show  a  death  rate  of  no  more  than 
104  per  cent.,  but  between  ages  39  and  45  the  mortality  is 
141  per  cent.  The  results  in  the  former  set  are,  however, 
doubtless  modified  considerably  by  the  disappearance 
through  lapse  and  maturity  of  a  large  number  of  the 
risks  before  the  dangerous  period  is  reached. 

Excessive  weight  is  a  more  potent  disqualification 
than  lightweight.  When  the  latter  is  a  family  charac- 
teristic and  the  applicant  is  in  good  health  it  is  commonly 
disregarded.  Overweights  are  prone  to  heart  disease, 
apoplexy  and  premature  arterio-sclerosis,  or  hardening 
of  the  arteries.  They  are  especially  liable  to  contract 
rheumatism  and  diabetes.  They  offer  little  resistance  to 
infection  and  shock,  and  succumb  readily  to  accidents 
and  surgical  operations.  As  a  rule,  they  eat  and  drink 
immoderately,  whilst  taking  insufficient  exercise. 

Irregular  Pulse.  In  all  cases  of  this  nature  repeated 
examinations  are  made  to  ascertain  whether  the  irregu- 
larity is  of  a  permanent  or  temporary  character.  A  per- 
sistent condition  of  rapid,  intermittent  or  irregular  pulse 
is  always  cause  for  rejection. 

The  majority  of  declinations  will  come  under  the  fore- 
going heads,  but  there  are,  of  course,  innumerable  other 
causes.  Whilst  each  case  presents  an  individual  problem, 
the  medical  director  views  it  in  the  light  of  averages. 
In  a  doubtful  case,  the  question  is  not  so  much,  what 
will  be  the  result  of  accepting  the  particular  applicant, 
as,  what  would  be  the  effect  on  the  company's  business 
of  insuring  1000  such  risks. 

Blood  Pressure.  A  great  aid  to  selection  has  been  af- 
forded in  late  years  by  blood  pressure  readings,  secured 
through  the  medium  of  an  instrument  bearing  the  formid- 
able name  of  sphygmomanometer.  The  practice  has  been 
established  long  enough  to  prove  that  the  register  of 

23 


blood  pressure  is  not  only  valuable  in  detecting  function- 
al derangements  of  which  the  symptoms  are  obscure,  but 
also  in  giving  early  indications  of  serious  diseases  in  their 
incipient  stages.  The  records  of  one  company  show  that 
among  525  accepted  applicants  of  various  ages  with  an 
average  systolic  pressure*  of  152,  the  mortality  was 
30  per  cent,  higher  than  the  company's  general  average. 
In  another  group,  all  of  whom  were  rejected,  the  average 
systolic  pressure  was  161.  These  cases  were  followed 
up  and  investigation  disclosed  among  them  a  death  rate 
almost  250  per  cent,  of  the  company's  average. 

Average  blood  pressure  readings  are  as  follows : 

Ages  15  to  20 119 

"     26  to  30 120 

"     41  to  45 : 123 

"      51  to  55 133 

56  to  60 134 

THE  MORAL  HAZARD 

In  many  applications  for  Life  Insurance  an  element 
enters  which  is  often  indefinable  and  sometimes  dealt 
with  by  intuition  rather  than  on  any  fixed  principles.  On 
the  other  hand,  the  moral  hazard  is  at  times  flagrantly 
apparent,  as  when  an  able-bodied,  self-supporting  man 
attempts  to  place  insurance  on  an  aged  parent,  with  him- 
self as  beneficiary.  Between  such  a  case  and  that  of  a 
man  who  has  recently  failed  in  business  there  is  a  marked 
difference  in  the  degree  of  moral  hazard,  but  it  is  by  no 
means  negligible  in  the  latter  instance. 

A  moral  hazard  is  apprehended  and  consequent  in- 
vestigation is  made,  when  the  proposed  beneficiary  has  no 
apparent  insurable  interest,  when  the  amount  of  insur- 
ance applied  for  is  larger  than  the  income  of  the  appli- 
cant would  seem  to  warrant,  when  the  applicant  is  a 
man  of  shady  reputation  or  one  addicted  to  some  form 
of  dissipation.  Men  who  have  been  convicted  of  crime, 
who  have  attempted  suicide,  been  arrested  for  carrying 
concealed  weapons,  fined  for  automobile  speeding,  as  well 


*Systolic  blood  pressure  is  that  occasioned  by  the  regular  con- 
traction of  heart  and  arteries  in  forcing  the  blood  outward.  Diastolic 
blood  pressure  is  that  produced  by  the  expansion  of  heart  and  arteries 
in  the  regular  process  of  beating. 

24 


as  persons  whose  business  is  speculative  or  questionable, 
present  cases  of  moral  hazard. 

It  is  probable  that  the  rapidly  extending  practice  of 
writing  business  or  corporation  insurance  involves  moral 
hazard  in  a  comparatively  new  form.  In  these  cases  the 
beneficiary  is  usually  a  firm  or  company  which  pays  the 
premiums  and  the  insured  an  officer  or  employe.  Con- 
servative companies  will  not  accept  applications  for  this 
kind  of  insurance  without  carefully  investigating  the  re- 
lations of  the  interested  parties  and  establishing  the  fact 
of  a  genuine  insurable  interest. 

From  the  foregoing  it  will  be  inferred  that  coincident 
with  the  constant  effort  of  the  companies  to  secure  new 
business  is  an  endeavor  to  keep  their  risks  at  a  standard 
which  will  result  in  a  death  rate  not  to  exceed  that  called 
for  by  the  mortality  tables.  As  a  matter  of  fact,  most 
companies  succeed  in  maintaining  an  average  mortality 
considerably  lower  than  the  tabular,  and  this,  as  we  shall 
see,  is  one  of  the  two  main  sources  of  dividend  returns 
to  policyholders. 


8  121  B 

25 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

II 
1  1 .     State  the  basic  principle  of  insurance. 

The  distribution  among  a  number  of  the  individual 
loss. 

12.     Explain  the  difference  between  "risk"  in  the  conven- 
tional and  in  the  technical  sense. 

In  the  former  sense  it  is  indefinite  and  incalculable; 
in  the  latter  it  is  the  reverse. 

1  3.     What  enables  a  company  to  make  a  definite  charge 
for  an  individual  risk? 

The  Law  of  Averages. 

1 4.  Wherein  does  Life  Insurance  resemble  gambling  and 
in  what  essential  is  it  distinguished  from  gambling? 

The  uncertainty  of  individual  life  places  the  insured 
in  something  of  the  position  of  the  gambler.  The 
essential  difference  is  that,  whilst  the  gambler  may 
lose  his  entire  stake,  the  insured  pays  his  premiums 
with  the  certainty  of  definite  return. 

15.  Define  the  technical  term  "probability." 

It  means  a  degree  of  chance  approximating  certainty, 
based  on  extensive  past  experience,  the  element  of 
precision  being  introduced  by  the  influence  of  the 
"law  of  averages." 

16.  What  degree  or  character  of  actual  risk  is  involved 
in  the  business  of  a  Life  Insurance  Company? 


Wome  frvf  tkmt  contingent  on  bad  management,  suck  as 
selection  of  risks  or  faulty  judgment  in  invest- 


17.     Name  some  of  the  factors  that  operate  in  selection 
of  risk*. 


inspection,   agent's    investiga- 
tion, tnmpmmitu9  rtgvlmtions  and  volition   of  appli- 


18.  In  me  work  of  "selection"  which  two  departments 
of  a  company  co-operate  closely? 

MeJicml  oxd  Actmorial. 

19.  In  your  opinion  what   is  the  most  important  thing 
for  tike   agent   to    ascertain    in    connection    with    an 
applicant's  habits? 

His  practice  in  the  use  of  olcokol. 

20.  Slate  some  of  the  advantages  of  the  Blood  Pressure 


It    it    inrfiMJIg    «•     detecting    cert***     pathological 

of  imp€nding 


Ill 

JfKortalttp  Qtableg  anb  $rmnples 
of  &ate=Jfttafeing 

BY  FORBES  LINDSAY 

The  early  charges  of  individual  underwriters  and 
companies  for  life  insurance  were  purely  arbitrary.  The 
first  definite  mortality  figures  to  be  applied  to  the  purpose 
were  compiled  by  Dr.  Richard  Price  in  1780  from  the  reg- 
isters of  two  parishes  in  the  city  of  Northampton,  Eng- 
land. Grossly  defective  as  it  was,  the  Northampton  Ta- 
ble remained  the  standard  of  computation  for  nearly  a 
century.  As  its  principal  error  was  the  indication  of  a 
mortality  greatly  in  excess  of  the  general  death  rate,  it 
proved  a  profitable  basis  for  the  calculation  of  life  in- 
surance premiums.  On  the  other  hand,  companies  that 
used  its  data  for  computing  annuities  suffered  severe 
losses. 

The  Carlisle  table,  published  in  1815  and  derived  from 
a  similar  source,  was  prepared  on  scientific  principles, 
with  great  discrimination.  Its  figures  are  about  40  per 
cent  lower  than  those  of  the  Northampton  Table  and 
approximate  to  the  figures  of  the  later  tables  compiled 
from  insured  lives  which  show  the  lower  mortality  that 
would  naturally  result  from  selection.  The  Carlisle  ta- 
ble came  into  extensive  use  and  is  still  considered  valua- 
ble by  actuaries,  especially  in  the  calculation  of  survivor- 
ship benefits,  because  of  the  preponderance  of  female 
lives  in  its  material. 

The  most  reliable  mortality  tables  are  those  produced 
by  investigation  of  insured  lives.  The  records  of  life 
insurance  companies  are  free  from  the  errors  and  falsi- 
ties to  which  population  statistics  are  subject.  The  former 
relate  to  comparatively  homogeneous  groups  and  embrace 
a  variety  of  relative  information  of  more  or  less  value 
in  the  consideration  of  risks.  The  first  such  table  was 
prepared  from  the  experience  of  the  Equitable  Society 
of  London  and  published  in  1834.  Nine  years  later  the 
tabulated  mortality  experience  of  seventeen  British  of- 

Copyrifhted  1916  and  1917  by  The  Pacific  Mutual  Life  Iniurance  Company  of  California. 


fices  was  made  available.  This  table,  known  as  the  "Ac- 
tuaries" or  "Combined  Experience,"  was  adopted  as  the 
standard  of  computation  by  the  Insurance  Department 
of  Massachusetts  which,  in  1859,  introduced  the  methods 
of  state  supervision  now  generally  practised  in  this 
country. 

The  Actuaries  Table  of  Mortality  is  deduced  from  an 
inspection  of  84,000  policies,  of  which  there  were  nearly 
14,000  terminations  by  death  in  a  period  of  71  years. 
The  average  of  duration  among  the  policies  was  some- 
thing less  than  eight  and  one  half  years,  which  fairly  cor- 
responds with  present  experience,  despite  the  great 
changes  in  policy  conditions  that  have  taken  place  during 
the  interim. 

The  female  risks  were  treated  separately  in  this  ex- 
amination and  exhibited  a  considerably  heavier  mortality 
than  that  of  the  males  between  the  ages  of  20  and  50,  but 
at  older  ages  the  comparative  condition  was  reversed. 
These  results  have  been  confirmed  from  many  sources, 
except  for  certain  recent  statistics  which  appear  to  in- 
dicate that  at  the  extreme  limit  of  old  age  males  outlive 
females.  Among  annuitants,  however,  the  mortality  of 
women  is  lower  at  all  ages  than  that  of  men.  This  pro- 
nounced difference  in  death  rate  between  female  policy- 
holders  and  female  annuitants  is  probably  attributable  to 
the  fact  that  the  former  are  generally  married  women  and 
mothers,  the  latter  generally  spinsters  and  well-to-do 
widows. 

The  question  of  female  morbidity  and  mortality  is 
constantly  growing  in  importance  to  life  insurance  com- 
panies and  is  particularly  interesting  because  of  the 
pronounced  modifications  in  both  sickness  and  death  rate 
among  women  which  may  reasonably  be  looked  for  as 
the  result  of  factors  already  in  operation.  The  excessive 
mortality  among  females  at  the  younger  ages  is  mainly 
due  to  child-birth,  involving  immediate  fatality  or  im- 
pairment of  vitality.  At  advanced  ages  women  have  the 
advantage  of  leading  less  exposed  and  arduous  lives  than 
men,  with  the  natural  consequence  of  superior  longevity. 
That  this  conclusion  is  correct  would  seem  to  be  borne 
out  by  statistics  applying  to  working  women  alone  which 
reveal  an  exceptionally  high  mortality  after  middle-age* 

How  will  the  insurability  of  women  be  affected  by 

26 


their  constantly  increasing  entrance  to  fields  of  manly 
occupations,  accompanied  by  a  tendency  to  avoid  mother- 
hood ?  The  question  is  an  urgent  one  because  the  pro- 
portion of  female  applicants  for  insurance  and  the  ex- 
tent of  protection  demanded  by  them  individually  are 
bound  to  increase  in  correspondence  to  the  growth  of  this 
movement. 

I  have  dwelt  at  length  upon  this  point  chiefly  be- 
cause it  affords  a  typical  illustration  of  the  many  con- 
siderations of  more  or  less  complex  character  that  enter 
into  life  insurance  policy  and  rate-making. 

The  first  important  mortality  schedule  to  be  con- 
structed in  the  United  States  was  based  upon  the  experi- 
ence of  the  Mutual  Life  Insurance  Company  of  New 
York,  with  arbitrary  adjustment  of  the  figures  for  the 
older  ages,  as  to  which  the  data  was  inadequate.  This 
table  was  published  in  1868  and  has  since  been  widely 
used  by  legal  reserve  companies,  as  well  as  by  state  in- 
surance departments  as  the  standard  upon  which  to 
compute  the  liabilities  of  companies. 

The  "American"  Table,  as  it  is  called,  and  other  mor- 
tality tables  compiled  in  this  country  show  marked  di- 
vergences from  the  British  statistics.  The  former  indi- 
cate a  decidedly  lower  death  rate  in  the  period  between 
35  and  75  years  of  age,  and  a  higher  rate  at  the  extremes 
of  life.  No  conclusive  explanation  of  these  differences 
has  been  arrived  at.  There  is  an  entire  absence  of  evi- 
dence to  support  the  deduction  that  the  general  average 
of  life  in  America  is  longer  than  that  in  Great  Britain, 
though  the  average  life  among  insured  persons  may  be 
so.  A  probable  explanation  may  be  found  in  the  effects 
of  selection.  In  the  United  Kingdom  a  much  larger  pro- 
portion of  the  insured  apply  voluntarily  than  in  this 
country.  It  will  readily  be  understood  that  a  better  av- 
erage of  risks  is  secured  where  a  large  majority  enter 
through  persuasion. 

Several  other  investigations  in  Great  Britain  and  in 
the  United  States  have  resulted  in  valuable  data  respect- 
ing mortality  and  collateral  subjects.  In  fact,  such  re- 
search is  constant  and  important  contributions  to  vital 
statistics  are  made  yearly  by  life  insurance  companies 
and  kindred  institutions. 

It  may  be  of  interest  to  note  the  variations  in  the 

27 


several  tables  of  mortality  which  have  been  employed 
by  insurance  companies  since  the  inception  of  the  busi- 
ness. We  will  take  the  indicated  death  rate  in  100,000  at 
age  45.  Northampton  (1780),  2,401;  Carlisle  (1815), 
1,481;  Actuaries  (1843),  1,221;  American  (1868),  1,116; 
Healthy  Males  (1869),  1,294;  Meeches  (1881),  1,120. 

The  average  mortality  indicated  by  the  standard  ta- 
bles is  considerably  in  excess  of  that  experienced  by  the 
majority  of  companies,  and  especially  those  which  use 
an  "ultimate"  table;  that  is,  one  based  on  risks  which 
have  been  insured  for  longer  than  five  years  and  so,  as 
a  whole,  have  outlived  the  effect  of  selection.  This  is  due 
to  more  effective  selection,  as  the  result  of  improved 
knowledge,  greater  skill  in  medical  examination  and  in- 
creased care  in  the  ''inspection"  of  risks.  The  experience 
of  recent  years  reveals  special  divergences  from  the  tab- 
ular death  rate  at  certain  stages  of  life.  For  instance, 
the  death  rate  among  insured  males  is  markedly  lower 
at  younger  ages  and  somewhat  higher  at  older  ages  today 
than  it  was  when  the  "American"  Table  was  compiled. 
Between  ages  25  and  40  the  expectation  of  life  has  in- 
creased two  to  three  years.  At  more  advanced  ages  the 
average  of  life  has  been  shortened,  varying  from  eight 
months  at  41  to  three  and  one-third  years  at  85.*  It 
must  be  understood  that  such  a  condition  will  not  affect 
the  average  mortality  in  a  group,  as  all  the  lives  exposed 
must  expire  ultimately,  and  the  effects  of  all  fluctuations 
must  be  confined  within  the  limits  of  human  life,  that  is 
to  say,  100  years.  Therefore,  a  reduction  of  mortality  at 
one  stage  of  the  series  will  necessarily  be  accompanied 
by  an  increase  at  another. 

There  is  in  the  possession  of  American  life  offices 
tabulated  data,  derived  from  their  several  experiences, 
which  affords  a  sufficient  basis  for  the  construction  of  a 
mortality  table  that  will  indicate  much  more  accuratelv 
than  do  the  tables  in  use  the  death  rate  among  insured 
persons  at  the  present  day.  The  compilation  of  such  a 
table  is  contemplated  by  the  Actuarial  Society  of  Americp 
and  its  scientific  value  will  be  ample  justification  of 

*This  condition,  the  cause  of  which  has  not  been  conclusively  shown,  is 
peculiar  to  the  population  of  the  United  States.  In  European  countries  there 
has  been  a  marked  decrease  in  mortality  at  all  ages  in  the  past  thirty  years. 


28 


the  task.  It  is  extremely  doubtful,  however,  whether  any 
practical  benefit  could  be  gained  by  the  adoption  of  a 
new  standard  of  computation  by  the  companies.  Cer- 
tainly the  popular  belief  that  such  a  step  would  result 
in  a  reduction  of  the  cost  of  insurance  is  a  delusion. 

The  premium  on  a  participating"  policy  represents  the 
average  cost  of  insurance  and  a  margin  of  safety.  The 
surplus  amount  serves  to  meet  adverse  fluctuations  in 
mortality  and  provides  dividends.  The  actual  or  net  cost 
to  the  insured  is  not  regulated  by  the  premium  charge, 
but  by  the  amount  of  saving  effected  through  profitable 
and  economical  management  and  through  careful  selec- 
tion of  risks,  which  amount  is  applied  to  the  reduction 
of  the  premium  in  the  form  of  a  dividend. 

To  make  this  matter  clearer,  let  us  assume  a  policy 
on  which  the  annual  premium  is  $24.  The  expense 
charge  is,  we  will  say,  $3,.  and  the  balance  is  designed 
to  meet  the  policy's  contribution  to  current  mortality  and 
to  supply  the  necessary  reserve  deposit.  Now,  we  will 
suppose  that  the  company's  actual  death-rate  is  suffi- 
ciently below  the  tabular  to  enable  it  to  save  $2  of  this 
policy's  calculated  contribution,  and  its  interest  earning 
is  sufficiently  higher  than  its  standard  rate  to  enable  it 
to  credit  this  policy  with  50  cents  from  the  latter  source 
of  profit.  At  the  close  of  the  year  the  policyholder  will 
receive  a  dividend  of  $2.50,  making  the  net  cost  of  his 
insurance  $18.50.  This  process  will  be  repeated  year 
after  year.  After  the  initial  payment  he  will  always  send 
his  check  to  the  company  for  the  difference  between  the 
gross  premium  and  the  net  cost.  It  is  obvious,  therefore, 
that,  the  net  charge  being  regulated  by  the  actual  cost 
to  the  company  of  carrying  the  risk,  the  amount  of  the 
premium  is  of  little  consequence. 

In  only  one  way  is  it  possible  to  reduce  the  cost  of 
insurance,  that  is  by  a  reduction  of  the  expense  charge, 
which  is  already  as  low  as  practicable.  Nor  would  the 
adoption  of  a  new  mortality  table  result  in  a  lowering  of 
non-participating  rates,  for  these  are  necessarily  fix**'1 
with  a  view  to  competition  with  the  net  cost  of  partici- 
pating insurance. 

THE  OPERATION  OF  MORTALITY 
A  mortality  table  has  been  defined  as  a  "barometer 

29 


of  vital  statistics"  and  again  as  "a  picture  of  a  generation 
passing  through  life."  A  more  graphic  simile  may  be 
furnished  by  comparing  it  to  a  time-table  marking  stages 
in  the  journey  through  life  of  a  generation  of  human 
beings.  Not,  however,  a  time-table  used  by  the  travelers 
themselves,  but  by  the  train  dispatcher  in  regulating 
their  movements. 

On  page  53  of  Gephart's  "Principles"  and  in  almost 
any  text  book  of  life  insurance,  will  be  found  tables  of 
mortality.  The  references  in  these  papers,  unless  other- 
wise indicated,  will  be  to  the  American  Table,  a  few  sets 
of  figures  from  which  are  inserted  for  immediate  con- 
venience. 


Age. 

Number 
Living. 

Deaths 
Yearly. 

Rate 
per  M. 

Expectation 
of  Life. 

10 

100,000 

749 

7.49 

48.72 

20 

92,637 

723 

7.80 

42.20 

30 

85,441 

720 

8.43 

35.33 

40 

78,106 

765 

9.79 

28.18 

50 

69,804 

962 

13.78 

20.91 

60 

57,917 

1546 

26.69 

14.10 

70 

38,569 

2391 

61.99 

8.48 

80 

14,474 

2091 

144.47 

4.39 

90 

847 

385 

454.54 

1.42 

95 

3 

3 

1000.00 

.50 

The  adjoining  mortaility  table  assumes  a  group  of  100,- 
000  beings,  at  the  age  of  10.  The  infant  mortality  is  of 
little  practical  value  to  companies  insuring  only  adults, 
except  in  so  far  as  it  enters  into  the  calculations  of  con- 
tracts involving  contingent  annuities.  The  first  column 
indicates  the  attained  age  of  the  survivors  of  the  group 
year  by  year.  The  second  column  gives  the  total  number 
living  at  the  beginning  of  each  year  and  at  every  age  be- 
tween 9  and  96.  The  third  column  shows  the  number 
of  deaths  each  year  in  a  group.  The  next  column  states 
the  mortality  rate  per  thousand.  The  final  column  ex- 
hibits the  average  expectation  of  life  enjoyed  by  the  sur- 
vivors of  the  group  in  any  particular  year  or  at  any  age. 
It  can  hardly  be  necessary  to  state  that  this  table  does  not 
represent  the  precise  experience  of  any  life  insurance 
company,  but  its  conclusions  are  scientifically  deduced 

30 


from  the  mortality  actually  experienced  among  insured 
lives  in  sufficiently  large  numbers  to  be  reliable.  Nor  is  it 
to  be  supposed  that  the  death  rate  of  a  company  will 
ever  be  precisely  consistent  with  that  expressed  by  the 
table,  although  there  may  be  exact  correspondence  in 
the  averages  taken  for  a  period  of  many  years.  In  fact, 
the  mortality  of  an  active  life  insurance  company  is  a 
constantly  fluctuating  quantity. 

Let  us  examine  our  group  at  the  beginning  of  the 
twenty-first  year  of  exposure,  when  the  survivors  are  30 
years  of  age.  Of  the  original  100,000,  there  are  living 
85,441.  During  the  year  720  of  this  number  will  die, 
giving  us  a  death-rate  expressed  as  8.43  per  thousand. 
The  survivors  at  the  beginning  of  the  year  had  a  life 
expectancy  of  35.33  years.  Since  some  of  this  number 
die  within  twelve  months  and  others  live  to  extreme  old 
age,  it  is  evident  that  the  expectation  of  life  has  no  direct 
bearing  on  the  individual.  It  indicates  the  average  dura- 
tion of  life  which  will  be  experienced  in  the  group.  The 
85,441  persons  living  at  age  30  have  a  total  of  30,018,630 
years  to  be  distributed  among  them,  which  gives  each 
35.33  years  on  an  even  division,  in  which  case  our  group 
would  totally  expire  at  age  66.  As  a  matter  of  fact,  the 
division  is  far  from  even  and  the  last  of  the  group  live  to 
age  96. 

It  is  clear  that,  considering  the  data  supplied  by  a 
mortality  table,  we  must  assume  the  attitude  of  regarding 
all  references  as  impersonal.  The  figures  have  no  appli- 
cation to  an  individual,  but  to  an  average  unit  in  an  imag- 
inary aggregation  of  human  beings.  We  cannot  correctly 
speak  of  a  particular  man  at  age  40  as  having  a  life  ex- 
pectation of  28.18  years,  though  that  will  be  the  average 
number  of  years  which  will  be  lived  by  a  group  of  men 
aged  40.  Nor  may  we  deduce  from  this  that  the  probable 
time  of  death  for  a  man  aged  40  is  in  his  68th  year.  The 
most  probable  year  of  death  for  every  member  of  the 
group  must  be  that  in  which  the  greatest  number  of 
deaths  occur.  That  year  is  the  73rd  of  life  when  the 
mortality  reaches  2,505.  Consequently  a  member  of  the 
group  aged  40  has  a  greater  probability  of  dying  in  rnc 
73rd  year  than  in  any  other  year.  Again,  the  probable 
life-time  is  indicated  by  the  stage  in  the  mortality  pro- 
gression when  the  chance  of  living  and  dying  is  equal. 

31 


It  must  be  the  year  in  our  table  when  the  members  of  the 
group  which  were  living  at  a  certain  age  have  been  re- 
duced to  exactly  half  their  number  at  that  age.  For 
example,  there  are  78,106  risks  surviving  at  age  40.  The 
survivors  at  age  69  number  40,390,  and  those  at  age  70 
number  38,569.  Therefore,  the  probable  life  of  the  mem- 
ber aged  40  is  between  29  and  30  years,  whereas,  the 
expectation  of  life,  or  average  life  of  the  group  aged  40. 
is  28.18  years. 

(DeMorgan,  Theory  of  Probabilities;  Venn,  Logic 
of  Chance;  Karl  Pearson,  Mathematical  Theory  of  Evo- 
lution; Makeham,  Assurance  Magazine  (1866)  XI,  315.) 

It  is  possible  that  a  company  might  have  an  exces- 
sively high  rate  of  mortality  over  a  limited  period.  Such 
an  experience  would  not  be  injurious  to  the  company, 
provided  it  held  a  sufficient  reserve  to  meet  the  excessive 
fluctuation  and  a  sufficient  number  of  risks  to  insure 
the  full  operation  of  the  Law  of  Average.  In  actual  prac- 
tice, however,  the  company  has  ample  ground  for  ex- 
pecting a  consistently  favorable  death  rate,  and  the 
average  experience  of  all  life  insurance  companies  com- 
bined is  less  than  80  per  cent,  of  the  tabular  mortality, 
varying  from  about  50  per  cent,  to  about  90  per  cent. 

The  American  and  similar  mortality  tables  are  not 
applicable  to  Industrial  Life  Insurance.  Companies  doing 
this  class  of  business  insure  infant  lives,  as  well  as  adults, 
in  whose  cases  the  occupational  hazard  is  uncommonly 
great.  The  mortality  experience  of  these  companies  is 
necessarily  much  greater  than  that  among  lives  insured 
under  what  are  termed  "ordinary"  policies,  that  is,  those 
of  $1,000  or  more  in  amount.  For  example,  at  age  40 
the  American  table  indicates  an  expected  death-rate  of 
9.79  per  thousand,  whilst  the  Standard  Industrial  table 
contemplates  14.65  deaths  at  the  same  age.  This  latter 
table,  which  is  quite  as  trustworthy  and  accurate  as  the 
former,  was  derived  from  the  experience  of  the  Metro- 
politan Life  Insurance  Company.  It  is  employed  by 
other  companies  doing  a  similar  business  and  is  the 
standard  of  the  New  York  Insurance  Department. 

INTEREST  AND  DISCOUNT 

Successful  operation  of  life  insurance  depends  upon 
two  main  factors— Interest  and  Law  of  Average.  In 

32 


order  to  make  his  calculations  confidently  the  actuary 
must  be  able  to  assume  certain  maximum  averages  of 
mortality  and  certain  minimum  rates  of  interest. 

If  it  is  known  that  $100  invested  will  yield  3  per  cent, 
interest,  or  will  have  earned  $3  at  the  end  of  a  year  from 
today,  we  may  treat  the  $100  in  hand  as  the  exact 
equivalent  of  $103  to  be  paid  one  year  hence.  Again,  if 
we  assume  that  the  $103,  principal  and  interest,  will  be 
left  to  accumulate  at  the  same  rate,  at  the  close  of  the 
second  year  there  will  be  payable  $103  plus  $3.09,  or 
$106.09.  The  last  sum  is  obviously  also  the  equivalent 
of  $100  in  hand,  and  of  course  each  one  of  the  amounts 
in  question  is  the  equivalent  of  the  other.  The  prolonga- 
tion of  this  calculation  constitutes  a  table  showing  the 
future  value,  year  by  year,  of  a  certain  sum  of  money, 
generally  $1.00,  improved  at  a  stated  rate  of  interest. 

When,  however,  it  is  desired  to  ascertain  the  present 
value  of  a  sum  to  be  paid  at  a  certain  future  time  or 
at  certain  future  intervals,  a  more  convenient  table  is 
available.  The  values  in  the  latter,  called  a  discount  or 
compound  discount  table,  are  derived  by  simple  pro- 
portion from  the  interest  table.  Thus,  if  $103  to  be  paid 
twelve  months  hence  is  the  equivalent  of  $100  present, 
$100  to  be  paid  at  the  end  of  the  year  is  the  equivalent 
of  100/103  of  $100,  or  $97.0874.  Similarly,  the  present 
value  of  $100  to  be  paid  at  the  end  of  two  years  is  equiva- 
lent to  100/106.09  of  $100,  or  $94.2596. 

These  tables  are  used  to  calculate  the  increment  to 
be  anticipated  from  the  investment  of  funds,  the  present 
value  of  future  payments  to  be  made  to  and  by  the  in- 
sured, as  well  as  for  other  purposes.  The  calculations 
of  the  actuary  constantly  involve  the  representation  of 
sums  of  money  in  their  equivalent  present  and  future 
values. 

On  these  two  factors — average  mortality  and  the  oper- 
ation of  interest — scientifically  employed,  the  principles 
of  rate-making  rest. 

REGULATING  PREMIUM  CHARGES 

The  aim  of  the  company  is  to  secure  as  nearly  a 
homogeneous  group  of  risks  as  possible,  to  the  end  that 
a  uniform  charge  may  be  made  to  all  persons  of  the 
same  age  for  certain  policies.  When  the  condition  of 

33 


an  applicant  excludes  him  from  the  standard  limits  of 
insurability  maintained  by  the  company,  his  application 
is  declined.  We  have  seen  that  some  companies  insure 
such  "under-average"  lives  on  special  conditions.  The 
prevailing  principle  of  premium-making  is,  however,  a 
uniform  charge  for  each  age  and  each  form  of  policy. 

Every  company  issues  numerous  differing  forms  of 
policies  involving  various  guaranteed  benefits  which  rep- 
resent liabilities.  By  far  the  largest  portion  of  these 
liabilities  are  future  death  claims,  but  there  are  others, 
such  as  endowments,  deferred  annuities  and  disability 
indemnities.  In  making  its  rates,  then,  the  company 
requires  to  calculate  on  each  premium  contributing  to  the 
reserve  such  a  sum  as  will  in  its  ultimate  accumulation, 
and  when  added  to  the  similar  contributions  of  other 
policies,  enable  the  company  to  meet  each  and  every  lia- 
bility at  the  time  of  its  maturity.  This  is  the  essential 
principle  of  Legal  Reserve  Life  Insurance  and  the  feature 
which  mainly  distinguishes  it  from  other  systems. 


S  122-B  34 


PACIFIC  MUTUAL  SCHOOL 

FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 
III 

21.  Name    the    two    mortality    tables    chiefly    used    in 
America. 

"American"  and  "Actuaries." 

22.  Compare   the   mortality   among  insured   males   and 
females. 

It  is  considerably  lower  among  the  former  between 
ages  20  and  50,  but  higher  at  greater  ages.  The 
mortality  of  female  annuitants  is  lower  than  that  of 
males  at  all  ages. 

23.  Name    the    conditions    which    are    fast    placing    the 
female  risk  in  a  new  aspect. 

The  constantly  increasing  tendency  of  women  to  earn 
their  own  livelihood  in  occupations  formerly  monop- 
olized by  men,  together  with  a  growing  disposition  to 
eschew  marriage  and  avoid  motherhood. 

24.  Comparative    mortality    statsitics    indicate    a    lower 
death  rate  in  America  than  in  Great  Britain  among 
insured  lives  between  the  ages  of  35  and  75.     Give 
a  probable  explanation. 

In  America  applicants  are  almost  invariably  secured 
by  solicitation,  in  Great  Britain  a  large  proportion 
take  the  initiative.  As  a  consequence  the  element  of 
adverse  self-selection  is  less  here  than  there. 


25.  Would    the   reduction    of    a    Participating    premium 
affect  the  cost  of  insurance? 

Not  in  the  least.  The  cost  of  insurance  is  not  regu- 
lated by  tine  charge  for  it,  but  by  the  company's  ex- 
perience in  death  losses,  interest  earnings  and  expense 
of  management. 

26.  How  would  you  calculate  the  probable  life-time  of 
any  member  of  an  insured  group? 

It  is  indicated  by  the  year  in  which  the  living  mem- 
bers of  the  original  group  equal  the  dead. 

27.  What  is  the  "expectation  of  life"? 

The  average  future  life-time  of  the  members  of  a 
group. 

28.  What   is   the    average    mortality    experience    of    the 
combined  companies? 

About  80  per  cent  of  the  tabular  rates. 

29.  What  are  the  main  factors  in  Life  Insurance  oper- 
ation? 

Interest  and  the  Law  of  Averages. 

30.  What    is    the    essential    principle    of    Legal    Reserve 
Life  Insurance? 

The  collection  through  premiums  of  such  sums  as  will 
in  their  ultimate  accumulation  enable  the  company 
to  meet  each  and  every  liability  at  the  time  of  its 
maturity. 


IV 

Jlet  premium 

BY  FORBES  LINDSAY 


If  we  deduct  from  a  life  insurance  premium  that  por- 
tion of  it  which  is  designed  to  meet  expenses  and  certain 
contingencies  of  management,  we  have  the  "net  premi- 
um" as  a  remainder.  Roughly  speaking,  the  net  premium 
supplies  the  funds  upon  which  the  company  depends  to 
discharge  all  claims  arising  out  of  policy  contracts;  the 
loading  furnishes  the  means  of  covering  the  cost  of  ad- 
ministration and  any  losses  involved  in  it.  For  the  pres- 
ent we  shall  consider  only  the  net  premium. 

Returning  to  the  mortality  table,  we  find  that  at  age  50 
there  are  69,804  lives  exposed.  Now,  let  us  suppose  that 
the  members  of  this  group  agree  to  insure  one  another  in 
the  sum  of  $1,000  each  for  one  year,  taking  this  table  for 
a  guide  and  making  no  allowance  for  expenses.  The  ta- 
ble indicates  that  962  of  their  number  will  die  in  the 
course  of  the  year,  and  the  group  must  make  provision 
to  pay  $962,000.  Dividing  this  amount  by  69,804,  the 
number  of  persons  in  the  group,  we  find  that  the  share 
of  each  is  $13.78.  You  will  notice  that  these  figures  cor- 
respond with  the  death  rate  per  thousand  at  age  50,  and 
we  might  have  reached  the  result  in  another  way.  If 
13.78  persons  per  thousand  of  a  group  die  within  a  year, 
in  order  to  pay  the  necessary  death  claims  of  $13,780  per 
thousand,  each  member  of  the  group  must  subscribe 
$13.78. 

So  far  the  calculation  is  a  simple  matter  of  proportion, 
but  we  must  introduce  a  very  important  factor  into  it. 
All  life  insurance  calculations  are  made  on  the  assump- 
tion that  premiums  will  be  paid  at  the  beginning  of  the 
year  and  death  claims  will  be  discharged  at  the  end  of  it. 
(This  is,  of  course,  at  variance  with  actual  practice,  as 
will  be  explained  hereafter.)  If  the  treasurer  for  our 
group  collects  immediately  the  aggregate  premiums  nec- 
essary to  meet  the  death  claims  which  will  not  accrue 
until  the  end  of  the  year,  it  is  evident  that  he  has  the 
use  of  the  money  for  twelve  months.  In  such  case  he 

Copyrighted  1916.  by  Pacific  Mutual  Life  Insurance  Company  of  California 


should  not  need  an  amount  equal  to  the  face  of  the  pros- 
pective death  claims,  but  only  such  a  sum  as  improved 
at  interest  for  a  year  will  equal  the  ultimate  payments. 
Let  us  assume  that  3  per  cent  can  be  earned.  Then,  our 
treasurer  must  have  in  hand  the  present  value  of  $962,000, 
payable  one  year  hence,  which  is  $934,006.  The  share  of 
each  member  in  the  latter  fund  will  be  $13.38. 

At  the  close  of  the  year,  claims  have  been  paid  on 
the  lives  of  962  members  and  our  group  is  reduced  to 
68,842,  each  of  whom  is  51  years  of  age.  The  table  shows 
a  definite  decrease  in  the  group  by  mortality  until  the 
last  members  expire  at  age  96. 

We  will  now  suppose  that  the  survivors  agree  to  re- 
peat the  arrangement  for  another  year.  Making  their 
calculations  on  the  same  basis  as  before,  they  must  pro- 
vide for  the  payment  of  $1,001,000  by  the  immediate  col- 
lection of  $971,871.  The  contribution  of  each  member 
to  the  latter  fund  will  be  $14.10. 

In  the  same  manner  our  group  might  continue  the 
insurance  through  life,  in  which  case  the  premium 
chargeable  to  each  of  the  survivors  would  increase  year 
by  year,  thus:  Age  50,  $13.38;  51,  $14.10;  52,  $14.94; 
60,  $25.92;  70,  $60.19;  80,  $140.26;  90,  $441.31 ;  95, 
$970.87. 

This  is  a  perfectly  scientific  system  of  rating  the  mor- 
tality charge  for  life  insurance.  Formerly  several  regu- 
lar companies,  called  Natural  Premium  companies,  con- 
structed their  premium  tables  on  this  basis,  with  due  al- 
lowance for  expenses.  The  plan  is  at  present  the  basis 
of  operation  of  several  assessment  associations.  It  has 
the  serious  disadvantage  of  a  high  and  constantly  in- 
creasing cost  in  the  later  years  of  life  when  a  man's  pro- 
ducing ability  is  naturally  decreased.  A  still  greater  ob- 
jection from  the  company's  point  of  view  is  that  as  the 
premiums  tend  to  become  onerous,  healthy  members 
lapse,  leaving  the  company  with  a  preponderance  of  im- 
paired risks  at  advanced  ages,  and  seriously  disturbing 
its  averages. 

The  present  uniform  Legal  Reserve  premium  is  de- 
rived from  the  "natural"  premium  by  reduction  and  equa- 
tion. The  actuary  calculates  the  present  worth,  or  equiv- 
alent sum,  of  all  the  net  future  natural  premiums  charge- 
able at  a  certain  age.  The  result  is  the  Net  Single  Pre- 
mium. From  this,  again,  he  calculates  its  equivalent 

38 


in  equal  yearly  payments  and  so  arrives  at  the  Net  An- 
nual Premium.  Under  this  system  the  insured  pays  more 
than  is  necessary  to  meet  his  contributions  to  the  mor- 
tality experience  during  the  earlier  period  of  life,  and  less 
during  the  latter,  the  balance  during  the  former  period 
being  accumulated  as  a  reserve  to  meet  the  excess  re- 
quirements of  the  latter  period. 

By  way  of  illustrating  the  process  of  arriving  at  net 
premiums  for  life  policies  we  will  now  suppose  that,  in- 
stead of  agreeing  to  insure  one  another  for  one  year  only, 
the  members  of  our  group  at  age  50  decide  to  carry  the 
arrangement  through  the  whole  term  of  life,  on  the  un- 
derstanding that  none  will  withdraw.  They  have  no  idea 
how  long  any  individual  will  live,  nor  how  soon  he  may 
die,  but  they  can  depend  with  practical  certainty  on  an 
average  length  of  life  and  a  definite  number  of  deaths 
at  each  age  in  the  progression. 

We  have  seen  that  in  order  to  pay  all  the  expected 
death  claims  among  1,000  lives  at  age  50,  amounting  to 
$13,780,  there  must  be  in  hand  at  the  beginning  of  the 
year  $13,380  which  will  earn  3  per  cent,  interest.  The  lat- 
ter sum  is  collectible  at  the  rate  of  $13.38  from  each  mem- 
ber and  is  the  single  net  premium  at  age  50  on  the  basis 
of  the  American  Experience  Table  and  3  per  cent,  interest 
for  $1,000  insurance  for  one  year.  The  first  step  in  the 
process  of  determining  what  premium  must  be  charged  to 
each  member  of  our  hypothetical  group  in  order  to  in- 
sure him  and  each  of  his  associates  in  the  sum  of  $1,000 
for  life  is  to  ascertain  the  amount  present  in  hand  which 
will  be  sufficient,  when  improved  at  interest,  to  meet 
each  and  all  of  the  death  claims  as  they  occur. 

We  start  with  69,804  lives  and  before  disposing  of 
them  shall  have  to  pay  out  $69,804,000.  The  table  leads 
us  to  expect  962  deaths  in  the  first  year,  1,001  in  the  sec- 
ond, 1,468  in  the  tenth,  2,321  in  the  twentieth,  and  so  on, 
until  at  the  close  of  the  forty-fifth  year  of  the  insurance 
and  the  ninety-fifth  of  life,  the  three  last  survivors  of 
the  group  die.  We  must  therefore  provide  for  the  pay- 
ments of  $962,000,  $1,001,000,  $1,468,000,  $2,321,000  and 
$3,000  in  the  respective  years  mentioned  as  well  as  a  def- 
inite sum  in  each  of  the  intermediate  years.  Our  3  per 
cent  discount  tables  indicate  that  the  present  value  of 
$962,000  payable  one  year  hence  is  $934,006,  that  the  pres- 
ent value  of  $1,001,000  payable  two  years  hence,  is 


39 


543.  In  like  manner  we  may  ascertain  from  our  mortality 
table  the  number  of  deaths  in  every  year  and  from  our 
discount  tables  the  present  worth  of  the  amount  to  be 
paid  in  death  claims  every  year.  The  sum  of  these  present 
values  will  give  us  the  aggregate  Single  Net  Premium 
which  our  group  would  need  to  have  in  hand  in  order  to 
cover  all  losses.  This  aggregate,  divided  by  69,804,  the 
original  number  of  our  group,  gives  us  $555.22,  the  in- 
dividual single  net  premium  and  the  precise  amount 
which  each  member  at  age  50  would  need  to  pay  in  order 
to  be  insured  in  the  sum  of  $1,000  for  life. 

It  rarely  happens,  however,  that  a  man  cares  to  pay 
for  his  insurance  outright.  By  far  the  majority  prefer 
annual  payments,  and  the  next  step  in  our  process  is  to 
ascertain  what  sums  receivable  yearly  in  advance  are 
the  equivalent  of  $555.22  in  hand. 

Now  let  us  assume  that  our  group  undertakes  to  pay 
each  of  its  members  $1.00  upon  the  anniversary  of  his 
birth,  beginning  at  age  50,  and  continuing  throughout 
his  lifetime.  It  is  obvious  that  in  order  to  carry  out 
such  a  plan  the  treasurer  must  be  in  possession  of 
$69,804,  or  enough  money  to  pay  $1.00  to  each  member 
at  once.  He  must  also  provide  to  pay  $68,842  to  the  sur- 
vivors one  year  hence,  $67,841  in  two  years  time,  $66,- 
797  in  three  years  and  $3.00  in  forty-five  years.  With  the 
aid  of  the  discount  table,  as  before,  we  may  determine  the 
present  worth  of  the  different  sums  that  are  to  be  paid 
out  year  by  year  in  order  to  give  every  member  of  the 
group  $1.00  at  the  beginning  of  each  year.  The  aggre- 
gate of  these  present  values  is  $1,065,973.  This  sum, 
divided  by  69,804,  the  original  number  of  the  group,  will 
give  us  $15.27  which  is  the  amount  that  each  man  would 
be  required  to  pay  at  once  in  order  to  assure  to  every 
member  an  annuity  of  $1.00  a  year  for  life. 

We  have  seen  that  the  net  single  premium  for  $1,000 
insurance  for  life  at  age  50  is  $555.22,  and  that  $15.27 
paid  at  the  same  age  is  the  exact  equivalent  of  $1.00 
a  year  to  be  paid  during  life.  Therefore,  $555.22  divided 
by  $15.27  will  give  us  the  life  annuity  which  may  be 
purchased  by  the  former  amount.  In  other  words, 
$36.36  to  be  paid  each  year  in  advance  during  life  is  the 
mathematical  equivalent  of  $555.22  in  hand.  But  we 
have  demonstrated  that  $555.22  is  the  net  single  premium 
for  $1,000  whole  life  insurance  at  age  50.  Consequently 

40 


$36.36  must  be  the  net  annual  premium  at  that  age.  That 
is  to  say,  the  net  single  premium  will  purchase  $1,000  of 
life  insurance  outright  or  it  will  purchase  a  life  annuity 
equal  to  the  net  annual  premium  on  $1,000. 

The  net  premiums  applicable  to  limited  payment  pol- 
icies are  found  by  a  similar  process.  For  example:  in 
order  to  find  the  net  level  or  annual  premium  which,  if 
paid  for  twenty  years,  would  be  the  equivalent  of  net 
level  premiums  paid  throughout  life,  we  make  an  addi- 
tion, as  before,  of  the  present  value  of  the  sums  to  be 
paid  year  by  year  in  order  to  give  every  surviving  mem- 
ber of  the  group  $1.00  a  year  at  the  beginning  of  each 
year  for  twenty  years.  The  aggregate  of  these  present 
values  is  $902,279,  and  the  contribution  of  each  of  the 
69,804  members  will  be  $12.93.  The  net  single  premium 
for  life  we  know  to  be  $555.22.  Dividing  this  sum  by 
$12.93  we  have  $42.95  which  is  the  net  annual  premium 
for  a  life  policy  to  be  purchased  in  twenty  payments. 

Now  let  us  revert  to  the  table  of  present  values  of 
future  payments  from  which  we  deduced  our  net  single 
premium  for  whole  life  insurance.  It  will  be  remembered 
that  we  added  the  present  values  of  all  the  mortality 
payments  from  age  50  to  95  inclusive  and  dividing  by 
69,804  obtained  $555.22  as  the  net  single  premium  neces- 
sary to  be  paid  by  each  member  in  order  to  assure  him 
of  $1,000  at  death. 

We  will  now  suppose  that  our  group  desires  to  se- 
cure $1,000  to  each  member  dying  within  twenty  years, 
without  any  benefit  to  the  survivors.  This  is  called 
Term  Insurance  and  we  shall  find  the  appropriate  net 
premiums  for  it  by  processes  similar  to  those  already 
employed.  If  we  discount  the  yearly  death  claims  oc- 
curring during  twenty  years  and  divide  the  aggregate  by 
the  number  of  original  members  we  shall  find  that  the 
net  single  premium  chargeable  to  each  is  $317.60.  We 
have  already  calculated  the  present  value  at  age  50  of 
an  annuity  of  $1.00  a  year  for  twenty  years.  By  dividing 
$12.93  into  $317.60  we  obtain  $24.57,  the  net  annual  pre- 
mium for  $1,000  at  age  50  on  the  twenty-year  term  plan. 

It  is  now  necessary  to  consider  a  contract  which  does 
not  involve  death  benefits,  to-wit:  Pure  Endowment. 
Under  this  form,  which  is  as  rarely  sold  as  Single  Premi- 
um insurance,  the  company  undertakes  to  pay  to  a  man  a 

41 


certain  sum  in  the  event  of  his  surviving  a  certain  period, 
and  nothing  in  the  event  of  his  previous  death. 

The  calculation  of  the  premium  for  Pure  Endowment 
is  extremely  simple.  The  mortality  table  tells  us  that 
of  our  group  numbering  69,804  at  age  of  entry,  but  38,569 
will  be  living  twenty  years  later.  It  will  be  necessary, 
therefore,  to  provide  for  the  payment  of  $38,569,000 
twenty  years  hence.  Discounting  the  claims  at  3  per 
cent  we  have  a  present  value  of  $21,355,655,  and  dividing 
this  amount  by  $69,804  we  get  $305.92  as  the  net  single 
premium  necessary  to  be  paid  by  each  member  to  assure 
him  of  $1,000  at  age  70,  provided  he  shall  be  alive  then, 
and  nothing  otherwise.  In  order  to  find  the  net  annual 
premium  for  this  contract  we  simply  divide  $305.92  by 
$12.93  and  obtain  $23.67. 

Endowment  insurance  is  usually  sold  under  a  guar- 
antee to  pay  a  certain  sum  in  the  event  of  the  insured 
surviving  a  certain  period,  and  the  same  sum  in  the  event 
of  his  previous  death.  We  have  seen  that  neither  term 
nor  pure  endowment  insurance  will  cover  both  these  con- 
ditions, but  that  each  of  the  contracts  provides  for  one 
of  them.  It  is  obvious  then,  that  in  combination  they 
will  furnish  the  essential  features  of  regular  endowment 
insurance.  And,  as  a  matter  of  fact,  regular  endowment 
policies  are  constructed  by  combining  the  premiums  and 
conditions  of  term  and  pure  endowment  insurance.  To 
illustrate:  the  net  level  premium  for  a  twenty-year  en- 
dowment insurance  of  $1,000  at  age  50  is  $48.24,  which 
is  arrived  at  by  adding  the  net  level  premium  for  twenty- 
year  term  insurance,  $24.57,  to  the  net  level  premium  for 
a  twenty-year  pure  endowment,  $23.67. 

The  net  premiums  for  all  other  forms  of  insurance 
are  determined  by  processes  similar  in  principle  to  the 
illustrations  which  have  been  given.  (Most  of  the  cal- 
culations in  the  foregoing  paper  may  be  found  in  extenso 
in  Fackler's  "Notes  on  Life  Insurance.") 

It  may  be  added  that  for  the  sake  of  facility  and  econ- 
omy of  time  the  actuary  employs  algebraic  formulae  in 
making  his  calculations  composed  of  values  designated 
by  symbols  known  as  the  "commutation  columns." 
These  values  are  a  grouping  of  the  elementary  items  de- 
scribed herein  in  such  a  way  that  they  can  be  readily 
used  by  the  actuary  to  determine  the  premium  he  may 
desire. 

8-123  42 


PACIFIC  MUTUAL  SCHOOL 

FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

IV 

31.  What  is  the  "net  premium?" 

The  portion  of  the  gross  premium  which  remains 
after  the  deduction  of  the  "loading"  for  expenses. 

32.  What    is    the    chief    disadvantage    of    the    Natural 
Premium  system  of  rating? 

It  necessitates  a  yearly  increasing  charge,  coincident 
with  the  advance  of  age,  with  the  consequence  that 
the  burden  of  expense  is  heaviest  in  the  non-produc- 
tive period  of  life. 

33.  Describe  the  process  by  which  the  actuary  arrives 
at  the  "level  premium." 

By  calculating  the  present  worth  of  all  future  net 
natural  premiums,  the  sum  of  which  give  him  the  net 
single  premium.  From  this  he  calculates  the  equiva- 
lent in  equal  year  payments,  which  represent  the  net 
annual  level  premium. 

34.  What     standard     tables     are     used     in     calculating 
premiums? 

The  mortality,  interest  and  discount  tables. 

35.  What    mathematical    relation    does    a  life    annuity, 

•-140 


equal  to  the  net  annual  premium,  bear  to  the  net 
single  premium  for  similar  insurance? 

One  is  the  exact  mathematical  equivalent  of  the  other. 

36.  Is  any  reserve  required   on  a  Term  policy?      If  so, 
for  what  purpose? 

Yes,  on  all  except  one-year  Term  policies.  The 
purpose  is  solely  to  provide  for  the  increase  of  mor- 
tality incident  to  advance  in  age,  and  consequently 
the  reserve  is  calculated  to  expire  at  the  end  of  the 
policy  term. 

37.  What     is     the      composition     of     an     Endowment 
premium? 

It  is  a  combination  of  the  premiums  for  Term  insur- 
ance and  Pure  Endowment. 

38.  What  mathematical  relation  does  the  reserve  of  an 
Endowment  policy  bear  to  the  face  of  it? 

The  former  is  the  sum  which,  received  annually  and 
compounded  at  a  special  rate  of  interest,  will  amount 
to  the  latter  at  the  end  of  the  policy  period. 

39.  A    Life    Insurance    company    makes    two    forms    of 
contract  which  do  not  involve  Life  Insurance.    Name 
them. 

Pure  Endovjment  and  Annuity. 

40.  What  is  the  chief  impression  made  by  the  study  of 
this  paper? 

That  Life  Insurance  is.  an  exact  science  and  that  a 
company  engaged  in  it  incurs  no  business  risks,  except 
those  incident  to  bad  management. 


Jtet  Beserbe 

BY  FORBES  LINDSAY 

It  has  already  been  said  that  all  life  insurance  prem- 
iums are  assumed  to  be  paid  at  the  beginning  of  the 
year  and  all  death  claims  at  the  end  of  it.  It  is  evident, 
then,  that  a  company,  even  at  the  very  commencement 
of  its  operation,  is  in  possession  of  funds  in  advance  of 
the  time  when  they  will  be  needed. 

To  emphasize  this  point  let  us  revert  to  the  illustra- 
tions used  in  the  last  paper.  We  had  a  group  of  persons 
insuring  one  another  for  a  term  of  one  year.  At  the 
beginning  of  the  year  the  treasurer  had  in  hand  the 
amount  which,  improved  at  3  per  cent,  would  equal  the 
expected  death  losses.  This  amount  he  held  in  reserve 
to  pay  the  claims  at  the  close  of  the  year.  We  then 
supposed  each  member  of  the  group  to  insure  himself 
for  the  entire  term  of  life  in  the  sum  of  $1,000  by  the 
payment  of  a  net  single  premium  of  $555.22.  These  pay- 
ments, singly  and  in  the  aggregate,  formed  a  reserve  to 
cover  future  mortality.  When  the  first  year's  death 
claims  had  been  discharged  from  the  fund,  the  balance 
would  be  held  in  reserve  for  the  same  purpose,  and  so 
year  by  year  until  the  payment  of  the  last  loss  and  the 
expenditure  of  the  last  dollar.  Next  we  calculated  the 
equal  annual  payments  to  be  made  during  life,  which 
would  be  equivalent  to  the  net  single  premium,  and  ob- 
tained the  net  level  premium  of  $36.36.  This  we  under- 
stood to  be  considerably  in  excess  of  the  mortality  re- 
quirements of  the  earlier  years.  As  a  matter  of  fact  the 
deaths  per  thousand  at  age  50  are  13.8  according  to  the 
table.  And  here,  again,  we  would  have  a  balance  to  be 
carried  to  reserve  after  disposing  of  the  death  claims  at 
the  end  of  the  year. 

From  the  foregoing  it  will  be  noted  that  with  the 
exception  of  one  year  Term  all  net  premiums  for  life  in- 
surance are  theoretically  composed  of  two  elements — the 
mortality  element  to  cover  the  cost  in  the  current  year, 

45 


and  the  reserve  element  to  provide  for  future  mortality 
in  excess  of  the  future  annual  premiums  which  may  be 
received.  In  order  that  the  net  premium  may  cover  these 
various  conditions  it  is,  of  course,  necessary  that  the 
assumed  rate  of  interest  be  earned.  The  failure  to  earn 
the  required  rate  of  interest  would  constitute  virtual  in- 
solvency since  the  company  would  not  technically  be  able 
to  fulfil  its  obligations. 

The  rate  of  interest  upon  which  the  company  bases 
its  calculations  is  an  important  feature,  and  safety  is  the 
chief  consideration  in  determining  it.  In  the  case  of  our 
group,  insuring  for  one  year  only,  3  per  cent  is  possibly 
an  ultra-conservative  rate\  but  where  the  insurance  is 
to  continue  for  life  it  becomes  necessary  to  take  into 
account  the  future  years  of  the  policy.  The  contract 
may  continue  on  the  books  of  the  company  for  seventy- 
five  years  or  even  longer  where  the  insured  is  under  the 
age  of  twenty  at  the  issuance  of  the  policy.  It  is  clear, 
therefore,  that  in  fixing  the  rate  of  interest  to  be  earned 
the  company  should  adopt  such  a  rate  as  will  with  prac- 
tical certainty  be  realized  in  the  distant  future.  This 
may  be  done  without  loss  or  disadvantage  to  the  present 
policyholders,  for  when  a  company's  earnings  are  in  ex- 
cess of  its  assumed  earnings  the  balance  is  distributed  to 
the  insured  in  the  form  of  dividends,  as  will  be  described 
later. 

Naturally,  the  lower  the  rate  of  interest  contemplated, 
the  larger  will  be  the  principal  necessary.  A  premium 
based  on  a  3  per  cent  reserve  is  higher  than  one  based  on 
4  per  cent.  The  policyholder  who  pays  the  former  prem- 
ium is,  however,  compensated  by  greater  cash  and  other 
values. 

Before  proceeding  to  demonstrate  the  sufficiency  of 
the  net  premium  to  meet  all  demands  arising  from  mor- 
tality we  will  anticipate  inquiry  as  to  the  effect  of 
withdrawals.  Discontinuance  of  members  from  a  group 
will  in  no  wise  impair  the  ability  of  the  group  or  com- 
pany to  discharge  its  contractual  obligations.  Let  us 
take  the  case  of  a  man  aged  50  paying  a  net  annual 
premium  during  his  lifetime.  In  the  first  year  his  policy 
would  contribute  a  mortality  cost  of  $13.45,  while  he  has 
paid  a  premium  of  $36.36.  In  the  second  year  the  net 
premium  would  again  be  in  excess  of  the  cost  of  the  in- 
surance although  ultimately,  on  account  of  the  increase 

46 


in  age,  the  cost  of  insurance  would  exceed  the  premium 
paid.  This  particular  policy  being  one  member  of  the 
group  is  liable  at  any  time  to  become  a  claim  just  as  the 
other  policies  in  the  group  are  liable  to  become  claims. 
If  the  policyholder  withdraws,  his  policy  would  no  longer 
contribute  the  mortality  cost  presented  above,  but  the 
company  would  be  relieved  of  its  obligation  to  pay  one 
thousand  dollars  at  his  death.  The  remaining  members 
of  the  group  would  continue  just  as  before  and  no  change 
in  the  premiums  would  be  required. 

Nor  is  the  company's  solvency  in  any  degree  depend- 
ent upon  its  continuing  to  secure  new  risks.  The  net 
reserves  are  ample  in  themselves  to  fulfil  all  contracts. 
A  legal  reserve  life  insurance  company  might  cease  to 
do  business  at  any  time  and  thereafter  pay  off  each  claim 
promptly  at  maturity.  Practical  illustrations  of  this  fact 
have  been  furnished  by  several  of  the  earlier  companies 
which  ceased  to  operate  actively,  and  gradually  wound 
up  their  affairs  in  the  course  of  a  number  of  years. 

A  legal  reserve  life  insurance  company  is  required 
by  the  insurance  laws  of  the  several  states  to  have  on 
hand  at  all  times  funds — approved  securities  being  con- 
sidered the  equivalent  of  cash — at  least  equal  to  the  NET 
VALUE  of  its  outstanding  contracts  appraised  on  a 
basis  which  is  technically  termed  the  Minimum  Legal 
Standard  of  Valuation.  This  Net  Value  is  necessarily 
the  amount  of  the  Reserves  since  these  are  accumulated 
specifically  for  the  purpose  of  discharging  the  contracts. 
The  Net  Value  represents  the  exact  difference  between 
the  present  worth  of  the  future  net  premiums  to  be  col- 
lected from  the  insured  and  the  present  worth  of  the 
benefits  guaranteed  under  the  policy.  In  the  case  of  a 
single  premium  contract  there  are  no  future  net  annual 
premiums  and  as  a  result  the  net  single  premium  itself 
is  the  reserve.  This  net  single  premium  is  in  itself  suf- 
ficient, if  the  assumed  rate  of  interest  is  earned,  to  pay 
the  claim  when  it  may  become  due. 

The  premium  and  the  liability  are  in  this  case 
equivalents.  To  illustrate:  at  age  50  the  net  single 
premium,  $555.22,  improved  at  3  per  cent,  will  amount 
to  $1,000  payable  at  death;  $1,000  payable  at  death,  dis- 
counted at  3  per  cent,  will  give  us  $555.22  at  present. 
A  difference  is,  however,  observable  when  the  policy  is 
to  be  paid  for  by  annual  premiums. 

It  must  be  understood  that  we  have  a  group,  sub- 

47 


ject  to  average  mortality,  constantly  in  mind.  The  state- 
ments would  not  apply  in  any  degree  to  a  single  life. 

Let  us  suppose  that  the  company  has  65,000  risks 
of  various  adult  ages  on  its  books,  insured  under  various 
forms  of  life  policies.  The  mortality  table  will  indicate 
the  numbers  living  and  dying  each  year,  from  which 
the  company  can  determine  the  premium  receipts  and  the 
death  claims  to  be  expected  year  by  year,  and  the  dis- 
count table  will  enable  it  to  ascertain  the  present  values 
of  the  amounts  in  question. 

If  the  company  should  make  such  a  calculation  at 
the  very  outset  of  its  business  with  a  number  of  policies 
written,  but  no  premiums  collected,  its  net  valuation 
statement  would  be  the  same  as  though  all  its  policies 
had  been  issued  on  the  single  premium  basis,  for  we  have 
seen  that  the  present  worth  of  the  net  annual  premiums 
on  any  life  policy  is  equal  to  the  net  single  premium  for 
whole  life  insurance.  But  we  will  assume  that  the  com- 
pany is  in  its  tenth  year  when  it  will  have  received  a  great 
many  of  the  premiums  which  were  classed  as  "future" 
at  the  time  it  commenced  operations.  It  will  also  have 
paid  a  number  of  death  claims  and  have  written  a  certain 
amount  of  new  business.  We  may  imagine  its  net  val- 
uation statement  to  show  the  following  figures :  Present 
value  of  guaranteed  benefits  under  outstanding  contracts 
$24,000,000.  Present  value  of  net  premiums  to  be  col- 
lected on  outstanding  contracts  $16,500,000.  There  is  a 
difference  here  of  $7,500,000  which  represents  the  reserve. 
This  sum  the  company  must  have  in  hand  and  should 
have  accumulated  from  the  premium  receipts  in  excess 
of  mortality  expenditures  during  previous  years. 

If  the  company  is  in  possession  of  this  $7,500,000  the 
present  value  of  its  future  premiums  receivable  plus  the 
reserve  held  to  apply  upon  future  death  losses  exactly 
equals  the  amount  of  the  aggregate  future  death  losses. 
The  company  is  solvent,  and  will  remain  so,  provided  it 
continues  to  accumulate  a  reserve  equal  to  the  difference 
between  the  present  value  of  the  premiums  on  its  out- 
standing policies  and  the  present  value  of  the  benefits 
guaranteed  under  them,  and  provided,  also,  that  it  real- 
izes the  rate  of  interest  employed  in  its  calculation.  In 
such  a  case  its  admitted  assets  would  exactly  balance  its 
liabilities  and  it  would  be  constantly  upon  the  point  of 
precise  solvency  without  any  margin.  We  shall  see, 

48 


however,  that  in  practical  experience  a  well-managed 
company  earns  excess  interest  on  its  investments  and 
enjoys  a  lower  rate  of  mortality  than  the  tabular  rate. 
It  is  thus  enabled  to  maintain  a  Contingency  Reserve 
in  the  form  of  "surplus"  or  "unassigned  funds." 

It  is  necessary  that  a  company  create  and  set  aside 
a  surplus  fund  for  the  purpose  of  meeting  incalculable 
and  unforeseeable  contingencies  which  may  arise  from 
various  causes  not  inconsistent  with  good  management. 
The  fund  is  derived  from  the  same  sources  as  the  sur- 
plus distributed  to  policyholders.  It  is  impossible  to 
regulate  the  amount  by  any  uniform  standard,  although 
some  states  prescribe  a  maximum  general  surplus,  stated 
in  percentage  of  assets.  The  proportions  of  its  contin- 
gency reserve  should  depend  upon  the  conditions  and 
prospects  of  a  company's  business.  The  fund  should 
be  ample  for  safety,  without  being  so  large  as  to  need- 
lessly withhold  from  the  policyholders  money  which 
might  be  returned  to  them  as  dividends.  The  character 
of  a  company's  investments  will  affect  the  question.  Se- 
curities which  are  liable  to  sudden  and  extensive  fluctua- 
tions should  be  supported  by  a  larger  surplus  than  would 
be  required  to  safeguard  farm  mortgages,  for  example. 
It  may  be  added  that  a  company's  general  surplus  does 
not  need  to  increase  in  the  same  ratio  as  its  assets,  be- 
cause with  growth  and  age  increased  stability  and  de- 
creased liability  to  adverse  contingencies  may  be  looked 
for  in  a  well-managed  concern. 

We  wTill  now  demonstrate  the  adequacy  of  the  net 
reserves  to  meet  all  the  contractual  obligations  of  a  com- 
pany, using  for  the  purpose  extracts  from  tables  given 
in  Fackler's  "Notes  on  Life  Insurance," , where  the  calcu- 
lations are  carried  out  year  by  year  from  age  50  to  the 
end  of  the  mortality  table,  -Whilst  a  certain  age  is  as- 
signed to  the  entire  group  in  the  illustration  for  the  sake 
of  convenience  and  simplicity,  the  calculations  do  not 
vary  in  method  or  principle  from  those  which  would  be 
made  if  a  number  of  lives  at  various  ages  were  involved. 
In  the  original  tables  the  unit  of  insurance  is  $1.00.  In 
these  papers  we  have  adopted  a  unit  of  $1,000  and  dis- 
carded decimals  without  any  attempt  at  minute  accuracy. 

The  columns  are  numbered  to  correspond  with  the 
following  legends: 


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COPYRIGHTED  BY 

THE  PACIFIC  MUTUAL  LIFE  INSURANCE  COMPANY 

OF  CALIFORNIA 

1916 


FORM    S-124 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 
V 

4 1 .  What     fundamental     conditions     are     necessary     to 
enable  a  company   to   meet  its  contractual    obliga- 
tions? 

The  maintenance  of  a  sufficient  reserve  and  its  con- 
stant accumulation  at  a  specific  rate  of  interest. 

42.  What  is  the  first  consideration  with  a  company  in 
determining  the  rate  of  interest  on  which  its  calcu- 
lations shall  be  made? 

Safety. 

43.  What  makes  it  necessary  for  a  company  to  fix  its 
operating  rate  at  a  lower  figure  than  its  current  rate 
of  interest  earnings? 

Life  insurance  contracts  involve  liabilities  many  of 
which  will  not  mature  until  the  far-distant  future 
when  interest  rates  may  be  much  lower  than  at 
present. 

44.  Why  is  the  condition  referred  to  in  the  preceding 
question  no  disadvantage  to  present  policyholders? 

Because  the  difference  between  the  actual  and  assumed 
earnings  of  a  company  is  returned  to  policyholders  in 
the  form  of  dividends. 

45.  Why  is  a  company's  ability  to  meet  its  obligations  in 
no  wise  impaired  by  lapses? 

Because  a  retiring  member  will  have  paid  his  full 
share  of  mortality  cost  and  expense  of  management 


and  on  his  retirement  the  company  is  relieved  of  all 
liability  on  his  account. 

46.  What  would  be  the  result  of  a  company  ceasing  to 
take  new  risks? 

Its  reserves  would  enable  it  to  meet  each  claim  at 
maturity  and  gradually  wind  up  its  affairs  without 
indebtedness. 

47.  What  is  the  "net  value"  of  a  company's  outstanding 
contracts? 

The  difference  between  the  present  worth  of  the  future 
net  premiums 'to  be  collected  from  the  insured  and 
the  present  worth  of  the  benefits  guaranteed  by  the 
outstanding  policies. 

48.  The  present  value  of  a  company's  outstanding  policy 
obligations   is    $17,000,000;    the    present    value    of 
net  premiums  to  be  collected  according  to  contract 
is  $12,000,000.     What  does  the  difference  between 
these  two  sums  represent? 

The  reserves  in  hand,  accumulated  from  premium 
receipts  in  excess  of  mortality  expenditures  in  pre- 
vious years. 

49.  Why  is  it  necessary  for  a  company  to  maintain  a 
contingency  reserve  or  general  surplus? 

For  the  purpose  of  meeting  contingencies  of  various 
kinds  which  can  not  be  foreseen. 

50.  Why  is  it  unnecessary  that  the  general  surplus  should 
increase  in  the  same  ratio  as  the  assets? 

Because  in  any  well-managed  company  liability  to 
adverse  contingencies  will  decrease  with  growth  and 
age. 


VI 

premium,  Hoabing, 
anb 


BY  FORBES  LINDSAY 

Net  premiums  are  the  mathematical  equivalents  of 
the  insurance  to  which  they  apply.  They  are,  theoret- 
ically, the  exact  cost  of  the  insurance. 

The  Gross  Premium  is  composed  of  the  net  premium 
and  a  "loading"  or  margin  to  provide  for  expenses  and 
various  contingencies.  The  contemplated  contingencies 
are  mainly  mortality  in  excess  of  the  "expected"  and  un- 
favorable investments.  In  a  well-managed  company 
neither  of  these  conditions  is  likely  to  obtain  extensively 
or  otherwise  than  exceptionally.  We  may  be  allowed, 
therefore,  to  look  upon  the  loading  as  a  fund  available  for 
the  general  expenses  of  management  and  such  incidental 
expenses  as  occur  with  more  or  less  regularity  in  the  or- 
dinary course  of  operation.  As  there  is  practically  no 
possibility  of  unexpected  drafts  upon  the  fund,  the  load- 
ing can  be  depended  upon  to  completely  cover  the  pur- 
pose for  which  it  is  designed. 

Except  in  the  case  of  companies  newly  entering  into 
business,  there  need  be  no  difficulty  about  meeting  ex- 
penses, but  no  problem  of  life  insurance  is  more  difficult 
than  that  of  making  an  equitable  distribution  of  expenses 
among  the  various  classes  of  policies.  Indeed,  it  is  a 
matter  of  such  complexity  that  an  approximation  to  pre- 
cisely fair  adjustment  is  the  utmost  that  any  actuary  may 
hope  to  accomplish. 

William  D.  Whiting  ("Transactions  of  the  Acturia't 
Society  of  America,"  Vol.  5)  makes  the  following  divi- 
sion of  an  established  company's  expenses  : 

1.  New  Business:      consisting  of  examination   fees, 
agent's  first  year  commissions,  and  advertising,  printing, 
salaries,  etc.,  incurred  in  getting  new  business;  say,  80 
per  cent  of  first  year's  premiums. 

2.  Collections:     consisting  of  agent's  renewal  com- 

Copyriehted  1916  and  1917  by  The  Pacific  Mutual  Life  Iniurance  Company  of  California. 


missions,  collection  fees,  exchange,  taxes  on  premiums, 
etc. ;  say,  10  per  cent  on  renewal  premiums. 

3.  Settlement:    consisting  of  the  expense  of  investi- 
gating and  resisting  death  claims;  say  \l/2   per  cent  of 
face  of  death  claims. 

4.  Investments:    cost  of  making,   handling  and   pro- 
tecting same,  bad  debts,  losses  over  gains,  taxes  and  re- 
pairs on  assets ;  say,  one  half  of  1  per  cent  per  annum. 

5.  General:     all    other    expenses,    particularly    those 
of  general  supervision,  actuarial  and  clerical ;  say  $1  per 
$1,000  of  insurance  annually. 

The  estimated  expense  in  the  third  division  appears 
to  be  too  high.  In  these  days  of  generally  incontestable 
policies  after  the  first  year,  proofs  of  death  are  practically 
all  that  are  necessary  to  establish  a  claim.  The  amount 
of  life  insurance  contested  annually  is  a  negligible  quan- 
tity. In  fact,  for  every  $1,000  paid  in  policy  claims  less 
than  $1  is  contested. 

Expenses  incident  to  the  investment  of  assets  are 
usually  charged  to  the  investment  account  and,  as  has 
already  been  stated,  profits  almost  invariably  exceed 
losses  in  this  department  of  the  business. 

Examination  of  the  foregoing  classification  shows 
that  every  expense  is  dependent  upon  some  other  factor 
of  the  business.  One  is  constant;  another  incidental. 
This  varies  with  the  age  of  the  insured,  that  with  the 
form  of  the  policy.  These  variances  give  rise  to  a  num- 
ber of  questions  which  are  extremely  difficult  of  satis- 
factory settlement.  For  instance :  To  what  extent,  if 
any,  should  existent  policies  be  assessed  to  meet  the 
expense  of  advertising  for  new  business?  Should  a  term 
policy  be  charged  with  any  of  the  expenses  incident  to 
investing  the  reserves?  What  distinctions  shall  be  ob- 
served between  paid-up  policies  and  premium-paying  pol- 
icies in  the  distribution  of  expenses?  Logical  conclu- 
sions on  these  and  numerous  similar  points  are  not  al- 
ways decisive  because  it  sometimes  happens  that  a  meth- 
od which  recommends  itself  on  the  ground  of  equity  is 
not  feasible  in  practice. 

Several  systems  are  employed  of  loading  the  net  pre- 
mium to  form  the  gross  or  office  premium,  and  of  dis- 
tributing the  various  expenses  among  different  classes 
of  policies.  All  these  methods  are  devised  with  a  view  to 
securing  the  utmost  possible  degree  of  equity. 

54 


It  will  readily  be  understood  that  the  expense  of 
putting  a  policy  upon  the  company's  books  is  very  much 
greater  than  the  annual  expense  of  carrying  it  thereafter. 
The  initial  expense  includes  commission,  cost  of  medical 
examination  and  inspection,  as  well  as  the  policy's  share 
of  the  general  expenses  for  the  year  of  entry.  In  the  ag- 
gregate these  will  equal  a  large  proportion  of  the  pre- 
mium and  may  even  exceed  it.  The  loading  will  cover 
only  a  fraction  of  these  charges  and  the  net  premium 
may  not  be  applied  to  the  purpose.  As  we  have  seen, 
in  order  to  preserve  the  company's  present  and  future 
solvency,  the  net  premium  must  be  used  to  discharge 
the  policy's  share  of  the  current  year's  mortality  claims 
and  the  balance  carried  to  the  reserve  held  to  meet  future 
liabilities. 

There  is  really  no  way  of  avoiding  this  difficulty  for 
it  is  but  logical  that  the  first  year's  expense  when  the 
business  is  placed  on  the  books  should  be  higher  than 
the  subsequent  years'  expenses.  The  fact  that  it  is  neces- 
sary to  take  money  from  the  general  surplus  to  pay 
this  excess  is  but  a  part  of  the  business  operation,  al- 
though it  of  necessity  holds  down  the  surplus  which  may 
be  payable  to  the  policyholder.  A  method  of  valuation 
is  being  used  by  some  companies  which  produces  in  the 
first  year  a  greater  loading  than  in  subsequent  years,  thus 
allowing  for  a  greater  expenditure  in  the  first  year.  This 
valuation  basis  is  known  as  the  "Preliminary  Term  Plan." 
The  arrangement  is  that  the  first  year's  insurance  is  the- 
oretically a  One  Year  Term  expiring  at  the  end  of  such 
period  and  being  renewed  as  a  regular  life  or  endowment 
contract,  as  the  case  may  be.  The  net  premium  for  this 
One  Year  Term  insurance  is,  of  course,  small  and  since 
the  regular  premium  for  the  life  or  endowment  policy 
has  been  charged,  the  loading  is  large.  Furthermore, 
the  One  Year  Term  requires  no  reserve  at  the  end  of 
the  first  year,  so  that  all  of  the  gross  premium  except 
that  portion  required  for  mortality  is  available  for  ex- 
pense. The  effect  on  subsequent  years  is  a  reduced  load- 
ing and  a  necessarily  more  rapid  increase  in  the  reserve. 
It  will  be  noted  that  this  method  of  Preliminary  Term 
valuation  has  the  very  decided  merit  of  requiring  en- 
trants who  may  lapse  at  the  end  of  the  first  year  to 
meet  practically  the  entire  expense  of  securing  such  busi- 

55 


ness  and  so  avoids  the  necessity  of  taking  money  from 
the  fund  created  by  the  older  policies  in  force. 

In  connection  with  this  plan  it  will  be  interesting  to 
note  what  some  of  the  well-known  writers  have  to  say- 
Whiting    says,    referring    to    his    subdivision    of    ex- 
penses which  we  have  quoted : 

"The  first  item — for  new  business — should  be  met 
during  the  first  year  by  each  class  of  new  entrants 
for  themselves,  so  as  to  avoid  a  loss  to  persistent 
members  being  occasioned  by  the  lapsing  or  death 
of  one  in  arrears.  The  old  members  have  built  up 
the  company  at  considerable  cost  to  themselves,  and 
own  it.  It  is  unjust  that  new  members  should  be 
allowed  to  participate  in  the  benefits  of  an  estab- 
lished plant  without  at  least  paying  their  own  cost 
of  entrance.  It  would  be  more  proper,  indeed  they 
should  be  charged  with  a  bonus  for  the  privilege  of 
entering,  to  go  to  the  old  members  in  reimbursement 
of  their  early  excess  of  expenses  in  establishing  the 
institution.  Old  members  should  not  need  the  new 
under  a  proper  arrangement  for  future  expenses  ; 
and  any  scheme  which  is  not  mathematically  self- 
sustaining  until  the  last  risk  is  disposed  of,  and  re- 
quires 'new  blood'  to  support  it,  is  insolvent  by  con- 
fession." 

On  the  same  highly  important  point  D.  H.  Wells 
expresses  himself  in  the  following  terms  ("Transactions 
of  the  Actuarial  Society  of  America") : 

"Whatever  may  be  the  cost  of  bringing  insurance 
to  the  attention  of  the  public,  or  the  value  of  the 
new  insurance  placed,  its  value  is  to  those  insuring 
or  their  beneficiaries,  not  to  those  previously  in- 
sured. It  is  true  that  some  slight  advantage  may 
accrue  to  the  existing  membership  from  the  broad- 
ening of  the  field  for  the  operation  of  the  law  of 
average ;  and,  in  theory,  some  slight  decrease  in  the 
expense  rate  might  be  possible  later  from  the  in- 
crease in  volume  of  business.  But  certainly  any  such 
incidental  advantage  to  the  existing  membership  is 
more  than  offset  by  the  advantage  to  the  incoming 
member.  He  cannot  in  fairness  ask  that  the  special 
expense  involved  in  bringing  the  benefits  of  the  com- 
pany to  him  should  be  shared  by  the  existing  mem- 

56 


bership  on  the  plea  that  his  incoming  broadens  the 
field,  when  the  existing  membership  constitute  the 
field,  to  which  he  only  adds  his  mite ;  when  the  bene- 
fits to  him  from  the  existence  of  such  a  membership 
are  a  hundred  thousand  times  any  benefits  he  can 
confer  on  them.    It  is  certainly  sufficient  that  he  be 
admitted    to    the    common    advantages   of   a    more 
stable  experience  and  a  decreased  expense  ratio,  if 
such  result,  without  requiring  that  others  be  taxed 
to  pay  the  cost  of  giving  him  these  advantages.    The 
assessing  upon  the  old  business  of  the  expense  of 
procuring   new   business    cannot   then   be   justified 
either  upon  the  ground  that  the  expense  is  due  to  or 
is  for  the  benefit  of  the  old  business." 
Ordinarily  life  insurance  policies  require  the  payment 
of  premiums  yearly  throughout  the  lifetime  of  the  in- 
sured or  over  a  definite  period.     We  have  said  that  the 
company  makes  its  calculations  on  the  assumption  that 
all  premiums  will  be  received  at  the  beginning  of  the 
policy  year.    In  practice,  however,  the  insured  is  granted 
the   alternative  of  making  his  payments   semi-annually 
or  quarterly.     A  considerable  addition   is   made  to  the 
yearly  charge  in  order  to  provide  for  this  privilege.   Two 
semi-annual  premiums  are  larger  than  the  annual  pre- 
mium, and  four  quarterly  premiums  still  larger  than  two 
semi-annual.     The  increase  is  made  necessary  by  the  re- 
quirement of  earning  a  full  year's  interest  on  the  pre- 
mium and  by  the  extra  expense  of  collection  involved 
in   more  than   one   payment.     In   case  of   the  insured's 
death  any  unpaid  portion  of  the  year's  premium  is  de- 
ducted from  the  amount  of  his  claim. 

SURPLUS 

Practically  the  only  sources  of  income  enjoyed  by 
a  life  insurance  company  are  premium  receipts  and  in- 
terest derived  from  invested  assets.  Practically  the  only 
outlays  of  a  life  insurance  company  are  those  connected 
with  the  payment  of  its  policy  claims,  the  investment 
of  its  funds  and  the  expense  of  management.  A  life 
insurance  company  is  not  permitted  to  engage  in  any 
commercial  or  financial  ventures  outside  of  the  imme- 
diate scope  of  its  business  of  insuring  lives  and  granting 
annuities. 

57 


Our  examination  of  the  Net  Premium  has  disclosed 
the  fact  that  the  operations  of  a  life  insurance  company 
do  not  contemplate  profit  in  the  sense  which  that  word 
has  in  manufacturing  or  mercantile  parlance.  The  verifi- 
cation tables  have  demonstrated  that  if  the  company's 
mortality  experience  tallied  exactly  with  the  tabular  in- 
dications, if  it  earned  neither  more  nor  less  than  the  cal- 
culated rates  of  interest,  and  if  the  securities  representing 
its  reserves  neither  depreciated  nor  appreciated,  it  would 
pay  each  claim  as  it  fell  due  and  when  the  last  had  been 
discharged  would  have  an  empty  treasury.  In  order  to 
make  this  hypothesis  complete  we  must  assume  that  the 
company  had  found  its  aggregate  premium  loadings  just 
sufficient  to  meet  the  ordinary  expenses  and  incidental 
demands  of  its  business.  The  premiums  charged  are  pre- 
cisely such  as  would  enable  the  company  to  fulfil  its 
contracts  under  the  above  conditions. 

In  actual  experience,  however,  every  sound  company 
makes  considerable  gains  or  savings  in  all  the  branches 
of  its  operation.  The  chief  gains  are  secured  in  the  mat- 
ters of  mortality  and  interest.  Almost  invariably  the 
actual  rate  of  the  former  is  lower  and  that  of  the  latter 
higher  than  those  assumed  in  the  calculations  upon  which 
the  premiums  are  based.  Additional  gains  are  derived 
from  economy  of  management,  appreciation  in  securi- 
ties and  surrendered  policies. 

Summarized,  the  premium  income  and  gains  of  104 
companies  in  1914  were  as  follows: 

Total  premium  income..»$493,024,934 

Per  Cent. 

Gain  from  Loading 9,836,206  1.99 

Gain  from  Interest 63,300,459  12.84 

Gain  from  Mortality 48,347,510  9.81 


Total   Gain $121,484,175  24.64 

It  will  be  noticed  that  slightly  more  than  half  the 
aggregate  gains  were  derived  from  interest  and  a  very 
small  proportion  from  the  loading.  Among  80  per  cent 
of  the  companies  there  was  a  loss  from  loading,  but  in 
the  great  majority  of  instances  the  gains  from  mortality 
and  interest  were  sufficient  to  leave  a  substantial  margin 
after  deducting  the  loss  from  loading.  As  might  be  ex- 

58 


pected,  the  smaller  and  younger  companies  have  the 
advantage  in  mortality  savings  and,  to  a  less-marked 
extent,  in  interest  earnings,  but  in  the  total  gain  ex- 
hibit do  not  show  as  well  as  the  larger  and  older  com- 
panies by  reason  of  much  larger  ratio  of  expenses. 

DIVIDENDS 

Except  for  a  small  proportion  which  may  be  carried 
to  the  general  surplus,  these  gains  or  savings  are  returned 
to  the  policyholders  in  the  form  of  what  is  called  "divi- 
dends." This,  like  a  number  of  other  words  in  Life  In- 
surance terminology,  is  liable  to  convey  a  faulty  idea. 
The  dividend  paid  to  a  policyholder  differs  in  character 
from  one  paid  to  a  stockholder  of  a  commercial  corpora- 
tion. The  latter  is  distinctly  a  profit.  The  former  is  in 
the  main  a  return  of  a  not  used  and  not  needed  portion 
of  a  premium.  The  element  of  profit  does  enter  it,  how- 
ever, to  the  extent  that  it  is  affected  by  excess  interest 
earnings  and  increase  of  security  values. 

Possibly  the  distinction  between  a  dividend  under  an 
insurance  policy  and  one  derived  from  stock  owned  in  a 
corporation  may  be  made  clear  by  an  illustration :  The 
stockholders  of  the  corporation  give  the  president  $100,- 
000  with  which  to  conduct  the  business  for  a  year.  At 
the  end  of  that  time  he  reports  as  follows :  "I  could  only 
use  $90,000,  and  on  that  made  a  profit  of  $20,000  which 
is  available  as  a  dividend.  I  return  to  you  the  remaining 
$10,000  with  accrued  interest/'  In  this  case  the  $20,000 
would  be  a  true  commercial  dividend,  and  the  $10,000 
might  be  likened  to  the  dividend  payable  under  a  Life 
Insurance  policy. 

The  system  generally  followed,  and  that  required  by 
the  laws  of  Massaschusetts  and  some  other  states,  in  ap- 
portioning to  policies  their  respective  shares  of  the  divis- 
ible surplus  is  called  the  "contribution  plan."  It  is  sim- 
ple and  as  nearly  equitable  as  possible.  In  effect  it  se- 
cures to  each  policy  the  dividend  which  has  been  saved 
from  its  particular  premium.  If  the  mortality  cost  of 
insurance  for  the  current  year  is  less  than  the  amount 
charged  for  the  purpose  in  the  premium,  the  policy  is 
credited  with  the  difference ;  if  the  general  interest  rate 
for  the  year  is  in  excess  of  the  operating  rate,  the  policy- 
holder  is  credited  with  the  amount  of  such  excess  as  the 

59 


reserve  held  against  his  policy  represents;  if  the  actual 
expenses  of  the  company  are  less  than  the  aggregat< 
loading,  a  share  of  the  saving  is  credited  to  the  policy 
proportionate  to  the  size  of  its  premium  loading.  To  illus- 
trate: let  us  assume  two  policies,  each  of  $1,000,  the 
attained  age  of  the  insured  being  the  same.  One  policy 
has  a  reserve  to  its  credit  of  $400;  the  other,  a  reserve 
of  $200.  The  former  will  receive  twice  as  much  as  the 
latter  in  the  distribution  of  surplus  derived  from  interest. 
On  one  policy  the  net  amount  at  risk  is  $600;  on  the 
other  $800.  Therefore,  the  latter  would  receive  one-third 
more  than  the  former  in  the  apportionment  of  surplus 
arising  from  mortality  savings.  From  the  total  of  these 
credits  a  certain  amount  is  carried  to  the  general  surplus 
and  the  balance  is  the  dividend  applicable  to  the  policy. 

Formerly  a  grdat  many  policy  contracts  stipulated 
that  dividend  distributions  should  be  made  only  at  the 
end  of  five,  ten,  fifteen  and  twenty-year  periods.  The 
prior  death  of  the  policyholder  entailed  forfeiture.  This 
arrangement  had  the  objection  of  introducing  the  gam- 
bling element  into  the  transaction  and  led  to  the  accumu- 
lation of  large  surplus  funds,  with  the  consequent  en- 
couragement of  extravagant  operation.  A  New  York  law 
in  1906  prohibited  all  such  contracts  and  required  that 
all  dividends  should  be  apportioned  or  paid  yearly.  I*- 
is  now  the  general  practice  of  companies  to  make  annual 
distributions  of  surplus. 

Dividends  are  made  available  at  the  beginning  of  the 
policy  year  and  commence  with  the  policyholder's  second 
or  third  annual  payment,  the  practice  of  companies  dif- 
fering in  this  respect.  Dividends  may  be  used  as  cash 
in  reduction  of  the  premium  due,  left  with  the  company 
to  accumulate  at  interest,  or  applied  to  the  purchase  of 
paid-up  insurance. 

Another  method  of  disposing  of  dividends  which  is 
constantly  growing  in  favor  is  to  allow  them  to  accel- 
erate the  accumulation  of  the  policy  reserve  with  a  view 
to  curtailing  the  premiums  or  creating  an  endowment. 
In  this  manner  the  dividends  on  a  whole  life  policy  may 
be  left  with  the  company  until  the  reserve,  together  with 
the  dividend  accretions,  equals  the  single  net  premium 
at  the  attained  age  of  the  insured,  when  premiums  will 
cease.  Or,  the  premiums  may  be  continued  thereafter 

60 


and  the  dividends  allowed  to  accumulate  further  until 
they,  together  with  the  reserve,  equal  the  face  of  the 
policy,  when  it  will  be  paid  as  an  endowment.  Similarly, 
the  reserve  on  a  limited  payment  life  policy,  reinforced  by 
accumulated  dividends,  may  amount  to  the  single  net  pre- 
mium in  several  years  less  time  than  the  contract  period 
of  payments,  in  which  case  the  policy  will  become  paid- 
up. 

DISPOSITION  OF  THE  PREMIUM 

By  way  of  illustrating  the  principles  which  have  been 
set  forth  in  this  and  the  preceding  chapter,  let  us  assume 
a  policy  of  $1,000  on  the  Whole  Life,  Participating  plan, 
taken  out  at  age  33,  and  trace  the  disposition  of  the  pre- 
miums paid  by  the  policyholder. 

The  annual  premium  of  this  policy  is  $26.35,  payable 
for  life.  The  expense  element  is  $5.27,  leaving  an  effec- 
tive premium  of  $21.08.  This  effective  premium,  it  will  be 
noted,  is  still  somewhat  greater  than  the  net  annual  pre- 
mium of  $19.87,  shown  in  the  following  policy  statement 
as  the  precise  amount  required.  The  difference  is  ac- 
counted for  by  the  fact  that  the  entire  loading  has  not 
been  used  for  expenses.  The  effective  premium  is  strictly 
reserved  for  the  purpose  of  paying  the  policy's  share  of 
the  mortality  losses  in  the  ensuing  year  and  creating  a 
sinking  fund  to  meet  the  increased  cost  of  mortality  inci- 
dent to  advance  in  age,  and  so  permit  of  a  uniform  pre- 
mium charge  throughout  the  life  of  the  contract.  At 
age  33  the  tabular  death  rate  is  8.72  per  thousand  and  the 
mortality  charge  on  $1,000  of  insurance  is  necessarily 
$8.72.  At  each  succeeding  year  of  age  the  cost  is  natur- 
ally higher.  The  constant  annual  premium  of  $21.08  is 
equivalent  to  graduated  mortality  payments  beginning 
with  $8.72  and  increasing  yearly  up  to  age  95. 

Each  policy  account  is  kept  separately  and  in  detail. 
In  the  case  which  we  are  considering,  the  first  year'? 
statement  would  reveal  something  like  the  following  re- 
sults : 


61 


Premium    $26.35 

Expenses    5.27 


Effective   Premium  21.08 

Interest    for    one    year,    assuming    rate 
of  5%   earned 1.05 

Accumulating  fund  at  end  of  year $22.13 

Reserve  at  end  of  year 11.85 

Mortality  cost  assuming  saving  of  30%..     6.03 
Total  amount  required  to  cover  insur- 
ance liabilities  for  the  year $17.88 

Balance  $4.25 

It  should  be  explained  that  the  Expense  element  of  the 
premium  is  extracted  from  it  at  the  beginning  of  the 
year.  The  amount  in  question  is  used  to  meet  current 
expense,  and  interest  is  not  calculated  on  it.  This  item 
is  necessarily  much  larger  in  the  earlier  years  than  later, 
but,  for  the  sake  of  simplicity  in  illustration,  an  average 
rate  has  been  assumed  and  applied  to  both  exhibits. 
Usually  it  is  found  that  the  actual  mortality  experience 
does  not  call  for  the  full  amount  charged  for  the  purpose 
and  a  balance  is  carried  to  the  Surplus  Fund. 

The  next  year's  account  will  be  similar,  except  for  the 
addition  of  the  previous  year's  Reserve,  making  in  all 
$11.85  and  $22.40,  or  $34.25  at  the  beginning  of  the  year, 
to  be  placed  at  interest. 

The  amount  at  risk,  or  the  company's  stake  in  the 
transaction,  decreases  in  proportion  to  the  growth  of  the 
Reserve,  although  the  Mortality  increases  at  the  same 
time. 

Let  us  take  the  twentieth  year.  The  death  rate  will  be 
15  per  thousand  and  consequently  the  mortality  cost  will 
be  $15  for  $1,000  of  insurance.  But  each  Reserve  fund 
has  accumulated  $306,  so  that  the  amount  at  risk  is  not 
$1,000,  but  the  difference  between  these  sums,  or  $694. 
The  individual  contribution  necessary  to  meet  the  death 
losses  is  not  $15,  but  $10.40,  for  if  15  die,  involving  claims 
of  $15,000  and  each  has  a  reserve  of  $306,  aggregating 
$4,590,  the  net  loss  is  only  $10,410.  This  effect  of  the 
policyholder's  contribution  to  the  reserve  in  reducing  the 

62 


company's  liability  has  led  to  the  Reserve  Fund  being 
spoken  of  as  the  "Self-Insurance  Fund." 

In   the  twentieth   year  the   policy  account   would  be 
somewhat  as  follows: 

Premium    $26.35 

Expense   5.27 

Effective  Premium 21.08 

Reserve  from  previous  year 287.90 

Interest  on  $308.98  at  5% 15.45 

-   $324.43 
Mortality  Cost  assuming  saving  of  30%     7.48 

Reserve  carried  forward 308.98 

316.46 


Balance  $7.97 

Our  two  policy  statements  show  that  the  insured  paid 
$4.25  more  than  was  necessary  the  first  year  and  $7.97 
more  in  the  twentieth  year,  and  there  was,  of  course,  a 
varying  excess  through  the  intermediate  years. 

If  the  company  had  realized  exactly  3  per  cent  on  its 
invested  assets,  if  the  death  losses  had  exactly  corre- 
sponded with  the  mortality  table,  and  if  the  entire  load- 
ing had  been  used  yearly,  the  amount  on  hand  at  the  end 
of  each  year  would  have  been  the  aggregate  reserve 
with  accrued  interest.  We  have  seen,  however,  that 
interest  earnings  in  excess  of  the  calculated  rate,  gains 
from  careful  selection,  and  economy  in  management 
will  create  savings.  The  total  of  these  savings  is  called 
the  Surplus. 

As  the  experience  of  the  company  in  the  matters  of 
mortality,  interest  and  expense  is  apt  to  vary,  a  portion 
of  the  earned  surplus  is  retained  to  provide  for  contin- 
gencies. The  balance  is  divided  among  the  policyholders 
in  the  form  of  dividends. 

In  the  case  under  consideration,  the  surplus  the  first 
year  is  $4.25,  and  at  the  end  of  the  twentieth  year  $7.97. 
The  company  would  pay  dividends  of  about  16  per  cent 
and  30  per  cent  respectively;  that  is  to  say,  at  the  end 
of  the  first  year  it  would  credit  the  policy  with  a  dividend 
of  16  per  cent  of  the  premium,  or  $4.21,  which  the  in- 
sured might  apply  to  the  reduction  of  the  second  pre- 


63 


mium,  or  employ  in  one  of  the  other  several  ways  of  dis- 
posing of  dividends.  Under  ordinary  circumstances 
there  would  be  a  gradual  increase  of  the  dividend  at  a 
nearly  uniform  rate,  year  by  year. 


8  125-B 

64 


PACIFIC  MUTUAL  SCHOOL 

FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

VI 

5  I .     What  makes  the  difference  between  the  gross  and 
the  net  premiums? 

The  "loading"  for  expenses. 

52.  What  is  the  heaviest  item  in  the  expense  of  company 
operation  ? 

The  cost  of  new  business. 

53.  What   are    the   chief    items    of   expense    incurred   in 
putting  a  policy  in  force  ? 

Commission,  medical  examination,  and  inspection,  as 
well  as.  the  policy's  share  of  the  general  expenses  for 
the  ensuing  year. 

54.  How   much    of   the    premium   is   available    to    meet 
these  expenses? 

No  more  than  the  loading. 

55.  Two  methods  of  meeting  the  excessive  first  year's 
expenses  are  practiced.     Name  them. 

One  is  to  draw  upon  the  general  surplus;  the  other, 
to  write  the  policy  on  the  "preliminary  term  plan." 

56.  Why  is  it  necessary  that  semi-annual  and  quarterly 
premiums    shall   be    more    than    one-half   and    one- 
fourth  of  the  annual  premiums? 

The  company  must  earn  a  full  year's  interest  on  the 


annual  premium  and  the  additional  payments  create 
extra  expense. 

57.  State,   in  percentage,   the  aggregate  gains  made  by 
1  04  companies  in  1 9 1  4  on  the  premium  income. 

24.64  per  cent. 

58.  What  disposition  is  made  of  the  gains  referred  to 
above? 

Except  for  a  small  proportion  which  is  transferred  to 
general  surplus,  they  are  returned  to  policyholders  as 
dividends. 

59.  State    the    principle    of   the    "contribution    plan"    of 
dividend  distribution. 

It  secures  to  each  policy  the  dividend  which  has  been 
secured  by  the  policy's  premium. 

60.  What  is  the  accelerative  plan  of  using  dividends? 

The  application  of  dividends  to  the  purpose  of  accel- 
erating the  reserve  accumulation,  with  a  view  to  cur- 
tailing premium  payments  or  creating  an  endowment. 


VII 

iswrrenber  Ualuetf  anb  $Jolicp 

BY  FORBES  LINDSAY 

It  has  been  shown  that  the  company  subtracts  from 
every  premium  a  certain  sum  which  is  set  aside  and 
reserved  to  meet  future  claims  under  policies.  The  veri- 
fication tables  in  a  former  paper  indicated  that  every 
policy  has  to  its  credit  a  constantly  increasing  reserve. 
This  is  a  fund  which  has  been  created  from  deposits 
of  the  individual  policyholder.  It  is  held  in  trust  for 
him  by  the  company,  which  recognizes  his  conditional 
ownership  of  it.  The  purpose  of  this  reserve  is  solely 
to  cover  a  risk  or,  in  the  case  of  an  endowment,  to  fulfil 
an  obligation,  which  the  company  has  assumed  in  favor 
of  the  insured.  If  the  policyholder  should  relieve  the 
company  of  the  risk  or  obligation  in  question  the  pur- 
pose of  the  reserve  standing  to  the  credit  of  his  policy 
would  be  extinguished,  and  the  fund  ought  rightfully 
to  pass  to  the  owner.  This  is  precisely  what  happens 
in  actual  practice.  In  the  event  of  a  policyholder  sur- 
rendering his  contract,  he  receives  the  value  of  his  re- 
serve in  cash  or  kind,  except  for  a  small  deduction 
which  will  be  referred  to  hereafter. 

The  grounds  that  justify  the  company  in  transferring 
the  reserve  on  this  policy  to  a  surrendering  policyholder 
furnish  equally  sound  reasons  for  permitting  him  to  bor- 
row the  reserve  or  a  portion  of  it.  Such  a  loan  consti- 
tutes a  first  lien  against  the  policy  and,  since  the  money 
was  entirely  contributed  by  the  policyholder  and  is  to  be 
used  only  in  the  discharge  of  his  policy  claim,  the  compa- 
ny's security  is  perfect.  If  the  policy  is  carried  to  maturity 
without  the  repayment  of  the  loan  its  amount  is  deducted 
from  the  claim.  If,  on  the  other  hand,  the  policyholder 
lapses  whilst  a  loan  stands  against  his  policy,  the  amount 
of  it  is  deducted  from  his  surrender  value.  There  is1  not 
even  a  chance  of  the  company  losing  interest  on  such 
loans,  for  that  is  usually  charged  in  advance  or  a  margin 
allowed  for  its  collection. 

Notwithstanding  the  obvious  logic  and  equities  insep- 

Copy righted  1916.  by  Pacific  Mutual  Life  Insurance  Company  of  California 


arable  from  the  contract  between  the  company  and  the 
insured,  policies  were  issued  during  the  early  period  of 
the  business  which  made  no  provision  for  refund  to  a 
lapsing  policyholder.  Some  companies  granted  sur- 
render values,  without  any  approach  to  uniformity  in  the 
proportion  of  the  reserve  returned  or  the  manner  of  ap- 
plying it.  All  such  accommodations  were,  however,  in  the 
form  of  voluntary  concessions.  The  first  recognition  of 
the  right  of  the  insured  to  a  surrender  value  took  prac- 
tical shape  in  1859,  when  the  New  York  Life  Insurance 
Company  began  to  issue  limited  payment  policies  embrac- 
ing provisions  for  paid-up  insurance  in  the  event  of  lapse 
after  two  years.  In  the  same  year  a  measure  was  intro- 
duced in  the  Massachusetts  Legislature  and  culminated 
in  the  "Non-forfeiture  Law"  of  1861.  This  Act,  which 
was  the  first  of  its  kind,  made  it  compulsory  upon  the 
companies  of  that  state  to  allow  the  reserve,  less  a  sur- 
render charge,  in  the  purchase  of  extended  insurance  for 
the  original  amount  of  the  policy,  upon  its  surrender. 
Similar  laws  were  shortly  afterwards  passed  by  other 
states,  and  at  the  present  time  non-forfeiture  provisions 
are  universal  features  of  the  policy  contract. 

Competition  and  excessive  desire  for  new  business 
have  led  some  companies  to  overstep  the  bounds  of  pru- 
dence and  to  disregard  the  interests  of  their  policyholders 
by  granting  surrender  values  on  a  much  more  liberal 
scale  than  the  legal  requirements.  Such  is  the  case  with 
companies  that  allow  surrender  values  in  the  second 
year  when  the  policy  account  cannot  be  clear  of  the  en- 
trance expenses  properly  chargeable  to  it.  From  what 
has  been  said  on  the  subject  in  the  immediately  preceding 
paper  it  will  be  understood  that  until  a  policy  has  been 
in  force  three  or  four  years,  at  least,  it  is  a  source  of  ex- 
pense rather  than  profit  to  the  company  unless  it  has 
been  written  with  the  first  year  as  Term  insurance.  In 
case  the  first-year  reserve  has  been  put  up  on  a  policy  and 
its  holder  lapses  in  the  second  year,  he  leaves  the  com- 
pany whilst  in  debt  to  the  remaining  members,  and  it  is 
clearly  unjust  to  place  a  bonus  on  his  delinquency. 

The  usual  legal  requirement  is  that  the  company  shall 
make  the  reserve  available  to  a  surrendering  policyholder, 
less  a  surrender  charge  of  not  more  than  2^  per  cent 
of  the  face  value  of  the  policy. 

66 


The  surrender  charge  is  justified  on  the  grond  that 
during  the  earlier  years  of  the  policy  it  will  not  gener- 
ally have  paid  off  the  expenses  incurred  in  securing  it. 
To  put  the  matter  otherwise,  the  level  premium  system 
of  computation  assumes  that  at  the  end  of  each  year  the 
company  will  have  on  hand  the  reserve  of  each  contract 
corresponding  to  the  standard  of  valuation.  The  reserve 
is  theoretically  derived  from  the  premiums  paid  on  ac- 
count of  the  particular  policy.  But,  as  we  have  seen  in  a 
previous  paper,  the  cost  of  placing  the  business  on  the 
books  may  be  equal  to  three-fourths,  or  more,  of  the 
initial  premiums. 

Consequently,  the  policy  must  start  in  arrears,  so 
to  speak,  to  its  own  or  to  the  general  account.  This 
condition  of  indebtedness  is  gradually  reduced,  and  the 
surrender  charge  usually  decreases  correspondingly  and 
ultimately  expires,  when  100  per  cent  of  the  reserve  is 
available  as  a  surrender  value. 

The  tendency  of  the  legislation  on  the  subject  has 
been  to  favor  the  individual  policyholder  at  the  expense 
of  the  body  to  which  he  belongs.  Whilst  the  law  defines 
the  minimum  surrender  value  which  may  be  allowed  to 
a  retiring  member,  it  erects  no  boundary  in  the  other 
direction  and  the  companies,  under  pressure  of  compe- 
tition, are  in  many  instances  granting  the  maximum  pos- 
sible surrender  values. 

In  general,  the  policy  provides  for  three  methods  of 
settlement.  Each  of  these  is  the  mathematical  equiva- 
lent of  each  of  the  others  based  on  the  corresponding 
reserve  value.  The  policyholder  has  the  option  of  either 
settlement  and,  theoretically,  his  choice  is  a  matter  of 
indifference  to  the  company.  It  is  probable  that  a  com- 
pany would  be  willing  to  allow  somewhat  larger  values 
in  kind  than  in  cash,  but  statutory  provision  compels 
the  mathematical  equivalence.  The  several  options  are 
as  follows: 

1.  To  take  in  cash  the  reserve  value  allowed  under 
the  policy. 

2.  To  take  a  paid-up  policy  of  such  amount  as  may 
be  purchased  by  the  reserve  value  as  a  single  net  pre- 
mium. 

3.  To  take  term  insurance  in  equal  amount  to  the 
original  policy  for  such  period  as  may  be  purchased  by 
the  reserve  value  applied  as  a  single  net  premium. 

67 


CASH  SURRENDER  VALUE 

This  mode  of  settlement  entails  complete  severance 
from  the  company.  It  would  appear  to  be  especially 
unreasonable  to  give  the  entire  reserve  to  a  policyholder 
under  such  circumstances,  except,  perhaps,  in  the  case 
of  a  policy  ten  or  more  years  old. 

Foreign  companies  are  much  more  conservative  in 
this  matter.  The  practice  in  Great  Britain  is  to  allow 
cash  values  ranging  from  25  to  50  per  cent  of  the  amount 
of  premiums  paid  on  the  policy. 

It  must  be  assumed  that  the  retiring  policyholder 
is  an  average  risk,  in  which  case  his  withdrawal  works 
a  distinct  loss  to  the  membership.  It  is  often  declared 
that  lapses  exercise  a  strongly  adverse  effect  on  a  com- 
pany's mortality  rate.  It  is  questionable  whether  the 
facts  support  this  contention  to  any  considerable  extent, 
although  the  tendency  to  persist  is  naturally  greater  on 
the  part  of  impaired  risks  than  on  the  part  of  sound 
ones. 

Another  reason  against  permitting  a  policyholder  to 
retire  from  the  company  at  will  and  abstract  the  entire 
reserve  value  of  his  policy  from  its  funds  is  found  in 
the  fact  that  this  option  is  most  extensively  exercised 
in  periods  of  business  depression  when  an  unusually 
large  demand  for  cash  is  apt  to  necessitate  the  sale 
of  securities  at  a  disadvantage. 

PAID-UP  INSURANCE  SURRENDER  VALUE 

If  this  option  be  chosen,  the  surrendering  policy- 
holder  receives  a  policy  for  such  an  amount  as  the  cash 
available  under  the  first  option  will  purchase  as  a  single 
net  premium.  No  further  premiums  are  required  upon 
the  policy  in  question,  which  is  payable  at  the  death 
of  the  insured,  or,  in  the  case  of  an  endowment,  at  the 
end  of  the  original  endowment  period,  unless  death  oc- 
curs previously.  When  a  surrender  charge  is  imposed 
the  amount  of  the  paid-up  policy  will  necessarily  be  re- 
duced proportionally. 

Some  companies  allow  the  policyholder  to  convert 
the  paid-up  policy  into  its  equivalent  cash  at  any  time, 
in  which  case  its  value  is  constantly  increasing  with  the 
enlargement  of  the  reserve  against  it. 

68 


The  question  arises  as  to  whether  such  paid-up  policy 
should  be  allowed  to  participate  in  dividends,  even 
though  the  original  policy  had  been  participating  and  a 
charge  was  made  on  its  surrender.  The  commuted  pol- 
icy will  play  a  part  in  the  creation  of  dividends,  but  not 
so  effectively  as  the  original  would  have  done  had  the 
premium  payments  been  maintained.  Any  dividends 
that  might  be  withheld  from  surrendering  members 
would  necessarily  accrue  to  the  benefit  of  their  associates 
who  kept  their  insurance  in  force,  and  it  would  appear 
to  be  good  policy  on  the  part  of  the  company  to  en- 
courage persistence  in  this  manner. 

EXTENDED  INSURANCE  SURRENDER  VALUE 

Under  .the  third  option  the  original  amount  of  in- 
surance is  carried  without  the  payment  of  premiums  for 
a  definite  period  on  the  term  plan.  In  the  event  of  the 
insured  dying  during  the  term,  the  face  value  of  the 
original  policy  is  paid  in  full.  On  the  other  hand,  if 
the  insured  should  outlive  the  term,  the  insurance  expires. 

It  would  seem  that  this  option  affords  as  great  op- 
portunity as  the  first  for  adverse  selection  against  the 
company.  Greatly  impaired  lives  might  be  expected  to 
discontinue  the  payment  of  premiums  and  secure  insur- 
ance at  the  minimum  cost  until  death.  No  doubt  this  is 
done  in  a  negligible  number  of  instances,  but  not  to  such 
an  extent  as  to  seriously  affect  the  experience  of  any 
company.  When  insurance  is  issued  upon  doubtful  risks 
it  is  customary  to  guard  against  such  a  contingency  by 
eliminating  the  extended  insurance  privilege  from  the 
contract.  The  element  of  unfavorable  selection  is,  how- 
ever, probably  present  to  a  sufficient  degree  to  warant 
the  exclusion  of  extended  insurance  from  participation 
in  dividends,  even  when  it  is  extended  to  the  paid-up 
insurance  surrender  value. 

Whenever  a  lapsing  policyholder  is  entitled  to  a  sur- 
render value  he  is  appropriately  credited  on  the  com- 
pany's books  even  though  he  should  make  no  demand. 
In  such  a  case  the  third  option  is  the  one  which  the  com- 
pany usually  adopts  on  his  behalf.  It  happens  not  in- 
frequently that  the  company  cannot  get  into  communi- 
cation with  a  lapsing  policyholder,  but  acts  as  his  trustee, 
nevertheless,  and  numerous  claims  have  been  paid  under 

69 


such   circumstances   to  beneficiaries  who   were   entirely 
unaware  of  the  protection. 

POLICY  LOANS 

Provisions  for  loans  against  the  policy  is  now  a  fea- 
ture of  practically  all  legal  reserve  companies  and  a 
necessary  accompaniment  of  cash  surrender  values,  for 
the  company  would  be  at  a  disadvantage  if  the  policy- 
holder  could  secure  cash  only  by  cancelling  his  contract. 
The  primary  purpose  of  the  "loan  values"  is  to  pay 
premiums  and  for  that  purpose  every  company  will 
advance  money  against  the  policy  reserve,  even  though 
the  contract  may  contain  restrictions  against  more  ex- 
tensive loans. 

In  recent  years  the  tendency  among  policyholders  to 
avail  themselves  of  the  loan  privilege  has  grown  to  such 
an  extent  as  to  cause  serious  concern  to  life  insurance  ex- 
ecutives. (See  Proceedings  of  Association  of  Life  Insur- 
ance Presidents,  5th  and  7th  years.)  During  the  past 
decade  policy  loans  have  increased  more  than  300  per 
cent.,  whilst  the  insurance  in  force  has  increased  less  than 
80  per  cent.  Considerably  more  than  half  such  loans  are 
not  repaid,  with  the  result  that  the  policy  is  lapsed  or, 
if  carried  until  death,  the  claim  under  it  is  reduced  by  a 
lien  consequent  on  the  debt. 

Without  doubt  a  large  proportion  of  policy  loans  are 
effected  to  satisfy  selfish  indulgence  and  not  to  meet 
urgent  needs. 

When  policy  loans  were  mainly  granted  for  the  pur- 
pose of  making  premium  payments  and  meeting  pressing 
obligations  the  effect  was  to  diminish  lapse.  Now,  how- 
ever, when  borrowers  generally  demand  a  large  pro- 
portion, if  not  all,  of  the  cash  available  to  them,  the  policy 
loan  has  a  detrimental  effect  on  persistency. 

Policies  as  generally  written  at  present  do  not  require 
the  beneficiary  to  join  the  insured  in  making  application 
for  a  policy  loan.  This  condition  has  unquestionably 
had  the  effect  of  increasing  borrowing  and  has  had  the 
further  consequence  that  the  first  knowledge  of  a  policy 
being  mortgaged  frequently  comes  to  the  beneficiary 
when  the  policy  becomes  a  claim. 

It  may  be  said  that  during  the  long  period  when  loans 
were  in  the  form  of  voluntary  concessions  upon  the  part 

70 


of  the  company  and  made  in  each  case  by  special  agree- 
ment with  the  policyholder,  there  was  little  or  no  com- 
plaint on  this  score  and  borrowing  was  practically  con- 
fined to  conditions  of  urgency. 

The  growing  practice  of  borrowing  on  policies  pay- 
able to  dependents  is  yearly  causing  enormous  reduction 
of  the  protection  originally  contemplated  by  the  insured 
and  any  repressive  measures  which  may  be  adopted  must 
tend  toward  public  welfare. 

These  strictures  do  not  apply  to  insurance  which  is 
taken  for  business  purposes.  The  collateral  value  is  an 
important  consideration  in  such  cases  and  the  entire  mat- 
ter assumes  a  different  aspect  when  the  beneficiary  under 
the  policy  is  a  corporation,  firm  or  business  man. 

The  loan  privilege  varies  with  different  companies 
both  as  to  amount  and  manner  of  granting  it.  The  pre- 
vailing practice  is  to  lend  a  sum  approximating  the 
terminal  reserve  for  the  current  year,  less  the  interest. 

With  a  view  to  self-protection  and  the  discourage- 
ment of  needless  borrowing  a  number  of  leading  compa- 
nies have,  in  the  past  few  years,  raised  the  rate  for  policy 
loans  from  5  to  6  per  cent,  and  reserve  the  right  to  defer 
payment  for  sixty  or  ninety  days,  unless  the  money  is 
required  to  pay  premiums. 

These  conditions  are  consistent  with  wise  and  con- 
servative management.  Some  states  compel  the  inclusion 
of  a  notice  clause  in  the  contract  and  it  is  highly  probable 
that  it  will  become  a  general  requirement,  as  it  is  with 
savings  banks.  It  is  questionable,  however,  whether  the 
remedies  recently  introduced  will  do  more  than  mitigate 
the  evil,  which  is  due  to  a  fundamental  defect  in  our 
policy  contracts  that  will  ultimately  require  radical 
correction. 

There  can  be  no  question  about  the  equities  in  the 
matter.  The  handling  of  insurance  funds  is  a  trust  and 
the  companies  are  in  duty  bound  to  do  the  best  they  can 
for  the  majority  of  their  policyholders.  The  borrowers 
do  not  represent  the  majority  and  there  can  be  no  sound 
reason  for  favoring  them  at  the  expense  of  the  remainder. 
This  is  what  a  company  virtually  does  when  it  allows 
the  full  reserve  to  be  borrowed  at  any  time  and  at  a  rate 
of  5  per  cent,  or  less.  Applications  for  loans  are  heaviest 
when  the  money  market  is  stringent  and  securities  con- 

71 


vertible  only  at  a  loss.  Repayments  are  largest  when 
money  is  easy  and  profitable  investments  difficult  to  find. 
In  other  words,  when  the  prevailing  rate  of  interest  is 
unusually  high  policyholders  borrow  from  the  companies 
at  the  comparatively  low  rate  guaranteed  by  the  policy 
contract.  When  the  general  rate  is  low  and  the  com- 
panies might  be  glad  to  have  the  money  remain  out,  it 
begins  to  return  to  them. 

One  of  the  British  companies  embodies  in  its  policy 
contract  a  provision  that  whenever  the  Bank  of  England 
rate  of  discount  is  as  high  as  7  per  cent,  at  the  time  that 
a  loan  or  cash  surrender  value  is  applied  for,  the  payment 
may  be  reduced  or  deferred  until  the  rate  of  discount 
declines  below  the  point  in  question.  Some  similar 
precaution  might  be  adopted  with  advantage  by  our 
companies,  such,  perhaps,  as  making  the  rate  of  interest 
on  policy  loans  fluctuate  so  as  to  correspond  with  general 
interest  rates. 

If  policy  loans  continue  to  expand  as  they  have  in  the 
past  fifteen  years  the  companies  will  be  compelled  to 
carry  a  larger  proportion  of  their  assets  in  the  form  of 
the  most  liquid  securities.  As  these  are  the  least  profit- 
able kind  of  investments,  the  consequent  effect  will  be  a 
reduction  in  dividends. 


72 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

VII 

6 1 .  Name    the    first    instance    of    a    policy    containing 
provision  for  surrender  value. 

The  limited  payment  policies  issued  by  the  New  York 
Life  in  1859,  which  made  provision  for  paid-up  insur- 
ance in  case  of  lapse  after  two  years. 

62.  In  what  manner  does  a  company  which  makes  no 
surrender   charge  work  an   injustice   upon   some   of 
its  members? 

By  requiring  persistent  policyholders  to  bear  more 
or  less  of  the  expense  of  entrance  incurred  by  those 
who  surrender  in  early  years. 

63.  What  is  the  usual   statutory  requirement  regarding 
surrender  values? 

That,  after  a  policy  has  been  in  force  for  three  years, 
a  company  shall  make  the  reserve  upon  it  available  to 
a  policyholder,  less  a  surrender  charge  of  not  more 
than  2y2  per  cent  of  the  face  value  of  the  policy. 

64.  Explain  the  Extended  Insurance  option. 

It  is  Term  insurance  equal  to  the  amount  of  the 
original  policy  and  for  such  a  period  as  may  be  paid 
for  by  the  cash  surrender  value  applied  as  a  single 
net  premium. 

65.  What    method    is    commonly    adopted    to    prevent 
doubtful     risks     from     surrendering     for     Extended 
Insurance? 


The  Extended  Insurance  option  is  eliminated  from  the 
policy. 

66.  What  action  does  a  company  usually  take  when  it 
is  ignorant  of  the  whereabouts  of  a  lapsing  policy- 
holder  who  is  entitled  to  a  surrender  value? 

The  Extended  Insurance  option  is  automatically  put 
into  effect  for  his  benefit. 

67.  What  proportion  of  policy  loans  is  repaid? 

Considerably  less  than  one-half. 

68.  In    what    respect    are    policy    loans    easier   to    effect 
now  than  they  were  formerly? 

The  latter-day  contracts,  generally  granting  revoca- 
tion of  beneficiary,  do  not  require  the  beneficiary  to 
join  with  the  insured  in  applying  for  a  loan,  as  was 
formerly  the  case. 

69.  To  what  class  of  insurance  do  the  objections  against 
borrowing  not  apply? 

To  Business  Insurance,  in  which  the  collateral  value 
of  the  policy  is  one  of  the  elements  of  the  protection 
afforded. 

70.  What  effect  upon  the  assets  of  companies  may  be 
expected  to  follow  increase  in  policy  loans? 

A  larger  proportion  of  the  assets  will  need  to  be  held 
in  liquid  securities,  which  are  the  least  profitable  form 
of  investments. 


VIII 

grtanbarb  Jforrng  of  policies;  anb 
Special  Jf  orms  of  polities 

BY  FORBES  LINDSAY 

The  earliest  form  of  Life  Insurance  contract  was  lim- 
ited to  the  term  of  one  year.  In  1721  the  London  Assur- 
ance Corporation  issued  the  first  whole  life  policy  which 
became  the  standard  form  for  level  premium  companies, 
although  they  issued  short  term  insurance  on  occasion. 
It  was  some  time  before  Limited  Payment  Life  and  En- 
dowment policies  were  offered  and  many  years  before 
they  attained  to  anything  like  the  popularity  which  they 
enjoy  at  present.  The  process  of  evolution  would  seem 
to  have  reached  its  culmination  with  the  latter-day  con- 
tract which  provides  indemnity  for  sickness,  accident, 
permanent  total  disability,  and  death. 

FUNDAMENTAL  FORMS 

Notwithstanding  the  limitless  variety  of  policies  there 
are  in  fact  but  two  fundamental  forms  of  Life  Insurance 
-Term  Insurance  and  Pure  Endowment.  The  combina- 
tion of  these  two  in  varying  degrees  produces  the  several 
standard  forms  of  policies.  The  Whole  Life  contract  is 
virtually  Term  Insurance  for  the  entire  life  expectancy, 
and  the  insured  is  required  to  pay  premiums  as  long  as 
he  lives.  The  Limited  Payment  Life  policy  is  identical 
with  the  Whole  Life,  except  that  the  insured  commutes 
the  payments  that  he  would  be  called  upon  to  make  under 
a  Whole  Life  policy,  undertaking  instead  to  complete 
the  purchase  of  the  insurance  in  a  definite  number  of 
years.  An  Endowment  policy  is  a  direct  combination  of 
Term  Insurance  and  Pure  Endowment,  and  as  a  result 
provides  for  a  certain  payment  by  the  company,  either  at 
the  death  of  the  insured  or  at  the  end  of  a  specified  period, 
if  the  insured  is  then  living. 

Numerous  modifications  of  these  standard  forms  are 
secured  by  the  addition  to  them  of  annuities. 

Copyrighted  1916.  by  Pacific  Mutual  Life  Insurance  Company  of  California 


PARTICIPATING  AND  NON-PARTICIPATING  POLICIES 

According  to  the  commonly  current  definition,  "Par- 
ticipating" insurance  is  that  which  shares  in  the  dividends 
or  "profits"  of  a  company;  "Non-participating  insurance 
is  that  which  has  no  interest  in  them.  This  method  of 
statement,  which  is  approximately  correct,  is  apt  to 
induce  a  faulty  idea  of  the  facts.  The  actual  condition 
may  be  more  clearly  explained  by  the  statement  that 
Participating  insurance  is  that  of  which  the  ultimate  cost 
is  determined  by  the  business  experience  of  the  company; 
Non-participating  insurance  is  that  of  which  the  net  cost 
is  arbitrarily  fixed  beforehand.  The  Participating  pre- 
mium is  admittedly  more  than  will  in  any  probability  be 
necessary  to  carry  the  insurance.  The  excess  is  charged 
for  the  sake  of  safety.  The  company  returns  this  excess 
after  the  year's  transactions  (involving  death  losses,  ex- 
penses and  interest  earnings)  have  revealed  the  exact 
amount  of  it.  In  the  case  of  Non-participating  insurance, 
the  company  anticipates  the  rebate,  making  its  calcula- 
tion on  its  own  experience  and  that  of  other  companies 
in  the  matter  of  mortality,  interest  and  expense,  which  are  « 

practically  the  only  factors  in  the  creation  of  dividends. 

Non-participating  insurance  is  sold  by  companies  hav-  •  ' 
ing  capital  stock.  This  resource  the  better  relieves  them 
of  the  necessity  of  making  the  precautionary  overcharge 
embraced  in  the  Participating  premium.  The  stockhold- 
ers assume  the  risk  of  the  insurance  costing  more  than 
the  premium  which  their  actuary  has  estimated  for  it, 
and,  on  the  other  hand,  enjoy  whatever  profit  may  be 
derived  from  its  costing  less. 

The  payments  which,  in  the  business  of  Life  Insur- 
ance, go  by  the  name  of  "dividends,"  are  neither  divi- 
dends nor  profits  in  the  commercial  sense,  but  simply 
refunds  derived  from  economies  and  good  management. 
The  mutual  company  waits  until  it  has  effected  the 
results  before  giving  its  policyholders  the  benefits  of 
them,  whilst  the  stock  company  fixes  its  net  rate  at  the 
outset  in  anticipation  of  them.  The  cost  of  insurance  is 
dependent  upon  the  same  factors  in  each  case.  Non-par- 
ticipating is  Participating  in  so  far  as  its  premiums  are 
made  possible  only  by  favorable  experiences  in  the  mat- 
ters of  mortality  savings,  interest  earnings,  etc.,  of  the 
company  issuing  it  just  as  in  the  case  of  a  mutual  com- 

74 


pany.  It  is,  in  fact,  the  only  kind  of  guaranteed  dividend 
insurance  possible. 

In  making  their  rates,  stock  companies  are  impelled, 
by  competition  among  themselves  and  with  mutual  com- 
panies, to  put  the  figures  as  low  as  they  may  without 
serious  danger  of  loss.  Whilst  Participating  insurance  is 
sold  at  considerably  higher  rates,  the  policyholder  pays 
for  it  practically  what  it  costs  the  company  to  carry  it. 
In  the  long  run  the  net  cost  of  the  insurance,  and  the 
net  average  premium  under  a  Participating  policy  in  a 
well-managed  company  will  be  lower  than  the  flat  prem- 
ium for  a  Non-participating  policy  of  a  corresponding 
form  at  the  same  age.  On  the  other  hand,  the  Non-par- 
ticipating policy  will  afford  protection  at  a  lower  cost 
during  the  earlier  years.  Each  of  these  plans  has  its 
special  advantage  over  the  other.  The  comparative  value 
of  either  is  necessarily  dependent  upon  the  conditions  and 
requirements  of  the  insured. 

We  will  now  proceed  to  examine  the  various  standard 
forms  of  insurance  in  detail. 

TERM  INSURANCE 

Most  Life  Insurance  contracts  combine  the  two  ele- 
ments of  protection  and  investment.  It  is  for  the  appli- 
cant to  decide  which  of  these  is  of  the  greater  value  to 
him.  It  is  possible,  as  we  have  seen,  to  secure  either  of 
these  features  without  the  other.  The  applicant  may  take 
a  Pure  Endowment,  which  has  no  insurance  element ;  or 
he  may  obtain  a  contract  affording  protection  solely.  An 
insurance  company  will  undertake  to  pay  a  certain  sum 
in  the  event  of  his  death  during  a  period  of  five,  ten, 
fifteen  or  twenty  years,  but  to  return  nothing  to  him 
under  any  other  circumstances.  This  is  pure  protection 
and  is  called  Term  Insurance.  It  is  similar  to  fire  insur- 
ance— a  specific  indemnity  to  cover  a  specific  risk,  with- 
out any  contingent  benefit. 

Ordinarily  the  Term  policy  provides  for  renewal,  or 
extension  over  another  period  on  the  same  conditions, 
except  for  an  increased  premium  to  correspond  with  the 
advanced  age.  The  contract  also  usually  includes  the 
privilege  of  converting  the  Term  policy  at  any  time  to 
some  permanent  form  of  insurance.  The  exercise  of 
either  of  these  options  must  involve  a  loss  to  the  insured 

75 


on  account  of  the  higher  cost  of  insurance  at  the  later 
age,  unless  a  change  is  made  to  a  policy  of  the  same  date 
as  the  original  Term  contract,  and  this  generally  necessi- 
tates the  outlay  of  a  considerable  amount  -of  money  to 
cover  the  deficiency  in  back  premiums. 

Term  insurance  affords  the  greatest  amount  of  pro- 
tection temporarily  for  a  given  premium  outlay.  This  is 
the  sole  advantage  to  be  urged  in  its  favor.  It  is  the 
lowest  in  cost  and  least  in  serviceable  qualities.  Beyond 
a  few  years,  say  seven,  it  is  the  most  expensive  form  of 
insurance,  for  the  reason  that  the  gross  payments  under 
it  represent  net  cost,  whereas,  under  a  Life  or  Endow- 
ment policy  the  surrender  value  deducted  from  the  aggre- 
gate premiums  will  reduce  the  net  outlay  to  less  than 
under  the  Term  policy. 

WHOLE  LIFE  INSURANCE 

The  essential  feature  of  the  Whole  Life,  or,  as  it  is 
sometimes  called,  the  Ordinary  Life  policy,  is  that  it 
affords  to  the  insured  the  greatest  amount  of  permanent 
protection  for  his  outlay.  At  age  30  a  man  may  secure 
to  his  beneficiary  practically  any  sum  by  paying  about 
2  per  cent,  of  it  throughout  his  lifetime.  If  he  should 
attempt  to  accomplish  the  same  object  by  saving  a  similar 
sum  annually,  it  would  require  the  compound  operation 
of  ordinary  bank  interest  during  longer  than  thirty  years 
with  little  more  than  an  even  chance  of  his  living  long 
enough. 

The  chief,  objection  advanced  against  Whole  Life  in- 
surance is  the  apparent  necessity  of  continuing  the  pay- 
ments throughout  life.  This  may  be  obviated  by  allow- 
ing the  dividends  to  accumulate  with  the  company. 
Under  this  condition  an  Ordinary  Life  policy,  issued  at 
age  30,  should  be  paid  up  at  about  age  65,  and,  in  the 
event  of  premium  payments  being  continued  thereafter, 
should  mature  as  an  Endowment  at  about  age  80-. 

LIMITED  PAYMENT  LIFE  INSURANCE 

This  is  a  form  under  which  the  annual  premiums  are 
restricted  to  a  certain  number,  after  which  the  policy 
is  paid-up  for  its  face  value.  The  contractual  obligation 
of  the  company  is  the  same  as  in  the  case  of  the  Whole 
Life  policy — to  pay  the  claim  at  death. 

76 


The  Limited  Payment  Life  contract  has  the  advantage 
of  not  requiring  premium  payments  in  advanced  age,  of 
enabling  the  maximum  cost  of  the  insurance  to  be  ascer- 
tained,, and  of  having  larger  reserve  values  in  proportion 
to  the  payments  than  the  latter,  but  involves  greater  sav- 
ing. These  distinctions  apply  to  Endowment  insurance  in 
more  marked  degree. 

Another  beneficial  feature  of  the  Limited  Payment 
policy,  on  the  Participating  plan,  is  the  continuance  of 
dividends  after  the  policy  has  become  paid-up.  The  chief 
disadvantage  attaching  to  the  corresponding  Non-par- 
ticipating forms  is  the  absence  of  this  feature. 

If  the  greatest  amount  of  protection  for  the  outlay  is 
desired,  Ordinary  Life  should  be  taken.  If  the  utmost 
extent  of  investment  is  the  object,  Endowment  will  se- 
cure it.  A  Limited  Payment  Life  policy  is  the  medium 
between  these  extremes  and,  for  that  reason,  the  Twenty 
Payment  Life  is  the  most  popular  of  all  policy  forms. 

ENDOWMENT  INSURANCE 

The  fundamental  feature  of  this  policy  is  its  guaran- 
tee of  a  certain  amount  of  cash  at  the  end  of  the  contract 
period.  To  illustrate :  Whereas,  a  Twenty  Payment 
Life  policy  will  assure  to  the  holder  paid-up  insurance 
for  its  face  value  at  the  end  of  twenty  years,  a  Twenty- 
Year  Endowment  will  pay  to  him  the  amount  in  cash  at 
the  same  time.  Both  policies  will  become  payable  in  the 
event  of  his  prior  death. 

In  the  Endowment  policy  the  investment  elements 
preponderate  over  the  element  of  protection  to  such  a 
degree  that  the  latter  becomes  a  negligible  quantity 
toward  the  close  of  the  term  when  the  policyholder's 
payments  will  have  aggregated  70  per  cent,  or  more  of 
the  face  of  the  policy. 

Special  jForms  of  policies 

There  is  no  commodity  the  price  of  which  is  so  stable 
and  so  precisely  related  to  cost  as  is  the  case  with  level 
premium  life  insurance.  The  actuaries  of  all  companies 
make  their  calculations  on  certain  formulas  which  are 
practically  alike,  using  certain  basic  tables  which  vary  but 
little.  There  may  be  slight  variations  in  the  mortality 

77 


charge  and  the  expense  item.  The  premiums  will  be  a 
little  lower  and  the  values  correspondingly  smaller  in  a 
company  on  a  3^  per  cent,  reserve  basis  than  in  one  011 
a  3  per  cent.  But,  notwithstanding  the  influence  of  these 
factors,  the  utmost  differences  between  the  premiums  of 
Legal  Reserve  companies  for  the  same  classes  of  policies 
are  not  considerable. 

From  the  foregoing  it  may  be  justly  inferred  that 
there  are  no  bargains  in  Life  Insurance  and  no  such  thing 
as  a  "cheap"  policy.  Every  contract  provides  one  hun- 
dred cents'  worth  of  insurance  value  for  each  dollar  of 
premium.  It  must  not  be  overlooked,  however,  that  the 
insurance  furnished  by  a  policy  is  not  limited  to  the  main 
provision  of  it  for  death  indemnity.  The  subsidiary 
clauses  of  the  contract  extend  the  protection  in  certain 
directions  and  restrict  it  in  others. 

Every  privilege  has  a  monetary  value  to  the  company 
and  every  restriction  saves  it  money.  For  example :  The 
presence  of  a  Disability  clause  entails  payment  of  claims 
which  could  not  be  incurred  in  policies  lacking  it;  the 
declaration  of  a  dividend  in  the  second  year  involves  an 
outlay  that  would  be  entirely  avoided  in  case  of  lapse  in 
that  year  of  a  policy  on  which  no  dividend  was  due  until 
the  next.  Conditions  relating  to  suicide,  travel,  military 
service — in  short,  all  the  conditions  of  an  insurance  con- 
tract have  their  effect  upon  the  treasury  of  the  company 
issuing  it. 

Following  this  explanation,  it  will  readily  be  under- 
stood that  no  two  policies  of  different  companies  are  pre- 
cisely alike  in  the  protection  provided.  They  may  be 
alike  in  form  and  have  the  same  premium,  with  similar 
surrender  values,  but  one  will  give  something  that  the 
other  withholds,  and  withholds  something  that  the  other 
gives. 

"FANCY"  FORMS  OF  POLICIES 

Whilst,  as  we  have  seen,  there  are  but  two  funda- 
mental forms  of  Life  Insurance,  innumerable  varieties 
of  policies  are  formed  by  their  combination.  There  are 
policies  under  novel  names  in  fantastic  forms,  but  in  their 
essentials  all  are  alike — all  are  combinations  of  protection 
and  investment  in  differing  proportions.  In  the  con- 
struction of  Life  Insurance  premiums  the  mortality  and 
expense  items  are  practically  stable.  There  are  only  two 

78 


other  factors  to  depend  upon  for  variations  of  standard 
forms — reserve  and  compound  interest — but  with  the  aid 
of  these  it  is  possible  to  construct  contracts  that  appear 
to  afford  exceptionally  liberal  benefits. 

The  Return  Premium  policy  under  which  the  insured 
is  guaranteed  the  payment  at  death  of  the  face  of  the 
policy  plus  the  sum  of  the  premiums  paid  has  the  aspect 
of  an  extraordinary  proposition,  but  is  based  on  the 
simplest  insurance  principles.  Let  us  assume  the  case  of 
a  $10,000  policy  with  a  regular  premium  of  $372.  If  the 
company  can  calculate  the  cost  of  carrying  the  risk  for 
$10,000  it  will  have  no  difficulty  in  ascertaining  the  cost 
of  carrying  it  for  $10,372  the  first  year,  $10,744  the  second 
year  and  so  on.  If  the  premiums  are  to  be  returned  the 
rate  will  be  adjusted  to  correspond  with  the  increased 
protection. 

A  policy  is  sometimes  issued  which  undertakes  to  pay 
its  face  value  in  the  event  of  the  insured  dying  within 
twenty  years,  but  should  he  outlive  that  period  to  give 
him  a  paid-up  "bond"  for  the  same  amount,  on  which 
six  per  cent,  will  be  earned  during  the  remainder  of  life. 
This  is  effected  by  simply  adding  to  an  ordinary  Twenty 
Payment  Life  contract  a  deferred  annuity  equal  to  six 
per  cent,  of  the  face  of  the  policy  and  making  the  ap- 
propriate charge. 

The  "coupon"  policy  which  yields  a  certain  sum  an- 
nually is  contrived  by  loading  the  reserve  to  provide  for 
the  payment  of  a  series  of  pure  endowments. 

It  should  be  added  that,  whilst  these  eccentric  forms 
of  contract  were  at  one  time  comparatively  common, 
they  are  now  issued  only  by  new  companies,  the  success- 
ful and  well-established  companies  generally  confining 
themselves  to  the  standard  forms  of  policies  which  have 
already  been  described  and  such  special  forms  as  will 
presently  be  noticed. 

INCOME  INSURANCE 

Since  its  introduction  about  twenty-five  years  ago,  the 
Income  policy  in  its  various  forms  has  steadily  grown  in 
popularity.  It  is  the  most  perfect  protection  possible, 
and  on  that  ground  appeals  to  all  classes  of  men,  having 
dependents.  It  is  written  upon  the  Life  and  Endowment 
plans  and  differs  from  the  standard  policies  solely  in  the 
method  of  paying  the  claim. 

79 


The  essential  feature  of  this  form  of  contract  is  that 
it  guarantees  to  the  beneficiary — or  the  insured,  in  case 
of  an  Endowment — a  definite  income  for  life,  or  a  stipu- 
lated number  of  years.  The  contract  creates  an  absolute 
trust  and  the  beneficiary  is  debarred  from  commuting  the 
income  or  disposing  of  it  in  any  manner  other  than  that 
provided  by  the  policy. 

COMBINATION  INSURANCE 

A  few  companies  which  are  chartered  to  do  business 
in  Accident  and  Sickness  Insurance  as  well  as  Life  In- 
surance issue  contracts  which,  in  addition  to  the  ordinary 
features  of  Life  Insurance,  afford  indemnity  for  disabling 
accident  or  sickness.  This  arrangement  has  several  ad- 
vantages, not  the  least  of  them  being  a  lower  cost  than 
if  the  various  forms  of  protection  should  be  secured  under 
separate  policies.  In  the  past  few  years  there  has  been 
a  marked  appreciation  of  Combination  Insurance,  if  not 
an  actual  demand  for  it,  on  the  part  of  the  public. 

JOINT  POLICIES 

Policies  are  issued  covering  two  or  more  lives,  but 
paying  a  claim  only  upon  the  first  death  to  occur.  The 
protection  is  not  as  great  as  would  be  enjoyed  under  in- 
dividual policies  and  the  cost  is  proportionally  less. 
This  form  of  insurance  is  commonly  issued  on  the  lives 
of  husband  and  wrife,  but  more  frequently  upon  partners 
or  others  associated  in  business. 

BUSINESS  INSURANCE 

The  application  of  Life  Insurance  to  various  needs  of 
business  has  in  late  years  become  prevalent  and  gives 
promise  of  much  greater  extension.  The  various  pur- 
poses which  are  served  by  Life  Insurance  in  commercial 
affairs  may  be  learned  from  the  accompanying  pamphlet. 
( Commercial  Life  Insurance,  (Form  195)  Forbes  Lind- 
say.) 

With  the  exception  of  a  few  clauses  designed  to  meet 
special  conditions  of  corporations  and  co-partnerships, 
policies  of  Business  Insurance  are  the  same  as  the  regular 
forms. 

80 


GROUP  INSURANCE 

This  the  latest  development  in  the  business  of  Life 
Insurance  and  will  not  have  passed  oat  of  the 
mental  stage  for  many  years  to  come.    Group 
is  written  upon  the  employees  of  a 
pality,  without  medical  examination  on  the  assumption 
that  a  favorable  average  mortality  may  be  relied  upon 
from  the  number  of  lives  involved.     If  this  conclusio 
is  sound,  it  would  appear  to  furnish  a 


for  the  corporation  to  carry  its  own  insurance 

THE  ANNUITY 

An  annuity  is  as  nearly  as  possible  the  reverse  of  in- 
surance. It  is  payable  during  life,  and  ceases  at  the 
death  of  the  annuitant.  The  actuary  calculates  his  rates 
for  annuities  upon  the  same  basis  as  he  does  those  for 
insurance — that  is,  a  combination  of  the  mortality  and 
compound  interest  tables — but  he  looks  at  the  risks  from 
opposite  points  of  view. 

The  mortality  table  used  in  calculating  Annuities 
provides  for  greater  longevity  than  do  th£  tables  em- 
ployed to  calculate  death  losses.  This  is  in  correspond- 
ence with  the  experience  that  annuitants  are  more  than 
ordinarily  long-lived. 

There  are  several  forms  of  Annuities,  of  which  the 
commonest  are  as  follows : 

1.  The  Life  Annuity  purchased  by  a  single  sum  on 
condition  of  the  income  commencing  three,  six  or  twelve 
months  later  and  continuing  for  the  life  of  the  annuitant. 

2.  The   Deferred  Annuity,  purchased  in  one  or  a 
series  of  payments,  with  the  income  to  commence  at  the 
end  of  a  stipulated  term  of  years, 

3.  The  Joint  and  Survivor  Annuity  in  which  two  or 
more  persons  are  included.    This  may  take  the  form  of 
either  of  the  foregoing,  but  has  the  additional  feature  of 
continuance  as  long  as  either  of  the  joint  annuitants 
may  live. 

As  no  portion  of  the  purchase  price  is  refunded,  the 
percentage  of  it  paid  by  the  companies  in  the  form  of 
income  is  much  greater,  particularly  at  high  ages,  than 

81 


the  rate  of  interest  which  can  be  secured  on  any  safe 
form  of  investment. 

Annuities  may  be  taken  advantageously  by  persons 
who  have  no  dependents,  nor  any  object  in  bequeathing 
money.  A  husband  and  wife  in  such  a  situation  may 
derive  the  utmost  benefit  from  their  means  by  converting 
them  into  a  Joint  and  Survivor  Annuity. 


S-127 


82 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

VIII 

71.  Define    Participating    and    Non-participating    insur- 
ance. 

Participating  insurance  is  that  of  which  the  ultimate 
cost  is  determined  by  the  business  experience  of  the 
company.  Non-participating  insurance  is  that  of 
which  the  net  cost  is  arbitrarily  fixed  beforehand. 

72.  Upon  what  factors  is  the  calculation  of  Non-partici- 
pating insurance  based? 

Upon  the  experience  of  the  company  and  of  other 
companies  in  the  matters  of  mortality,  interest  and 
expense. 

73.  What  is  the  most  popular  form  of  policy  and  why? 

The  Twenty  Payment  Life,  because  it  is  for  a  definite 
premium-paying  term  and  affords  a  fair  degree  of 
investment  at  moderate  cost. 

74.  Why    is   the    charge    for    Life    Insurance    practically 
the  same  in  all  companies? 

Because  the  actuaries  of  all  companies  make  their 
calculations  on  certain  formulas  which  are  practically 
alike,  using  certain  basic  tables  which  vary  very  little. 

75.  Why  should  all  the  subsidiary  clauses  of  a  contract 
be  taken  into  consideration  when  calculating  cost? 


••144 


Because  every  privilege  and  every  restriction  repre- 
sents a  monetary  value  to  the  company  issuing  the 
contract. 

76.  The  mortality  and  expense  elements  of  policies  be- 
ing   practically    stable    quantities,    what    other    fac- 
tors must  be  depended  upon  for  variations  of  con- 
tracts? 

Reserve  and  Compound  Interest. 

77.  Could  a  company  undertake  to  pay  a  policyholder 
six  per  cent  annually  upon  the  amount  of  his  pre- 
mium and  how  would  it  contrive  to  do  so? 

Yes.  Simply  by  loading  the  reserve  with  a  series  of 
pure  endowment  equal  to  the  amount  of  the  annual 
"interest''  payment. 


78.  What  is  the  chief  objection  to  a  company  writing 
Group  Insurance? 

It  is  in  an  experimental  stage  and  must  remain  so  for 
many  years  to  come,  until  the  experience  of  it  shall 
have  formed  reliable  data  on  which  to  form  calcula- 
tions. 

79.  Does  the  actuary  employ  the  same  mortality  tables 
in  calculating  Life  Insurance  and  Annuity  premiums? 

No;  for  the  latter  he  uses  tables  allowing  for  greater 
longevity,  experience  having  proved  that  annuitants 
are  more  than  ordinarily  long  lived. 

80.  Briefly  describe  the  Deferred  Annuity. 

It  is  a  contract  requiring  one  or  a  series  of  payments 
and  providing  for  an  annuity  to  commence  at  the  end 
of  a  stipulated  term  of  years. 


IX 

cp  Contract 

BY  FORBES  LINDSAY 

Whilst  an  insurance  contract  is  made  between  two 
parties, — the  insurer  (being  the  company  which  issues 
the  policy)  and  the  insured  (upon  whose  life  it  is  writ- 
ten),— there  is  usually  a  third  party  interested  in  it,  to- 
wit :  the  beneficiary,  to  whom  the  claim  is  to  be  paid  in 
the  event  of  death. 

A  Life  Insurance  contract  must  be  supported  by  a 
legal  insurable  interest.  The  insurable  interest  of  a 
man  in  his  own  life  fully  meets  this  requirement.  When, 
however,  insurance  is  effected  by  one  person  on  the  life 
of  another,  it  is  necessary  that  the  former  shall  have  a 
distinct  interest  in  the  continuance  of  the  life  of  the  latter 
and  not  merely  a  monetary  interest  in  his  death.  To 
put  it  otherwise:  The  person  who  effects  the  insurance 
must  be  able  to  show  direct  loss  as  likely  to  occur  to 
him  from  the  death  of  the  insured. 

Business  insurance  not  infrequently  involves  cases 
of  questionable  insurable  interest.  It  cannot  safely  be 
taken  for  granted  that  each  of  two  partners  has  an  in- 
surable interest  in  the  life  of  the  other,  nor  that  a 
corporation  has  an  insurable  interest  in  the  life  of  an 
officer  or  employe. 

In  their  own  protection,  companies  exercise  vigilance 
in  guarding  against  speculative  insurance.  If  moral 
hazard  is  apparent  or  suspected,  a  company  is  at  liberty 
to  decline  the  application  without  consideration  of  the 
legal  definition  of  insurable  interest.  After  one  or  two 
years  all  questions  connected  with  the  origin  of  the  con- 
tract are  rendered  inconsequential  by  the  incontestability 
provision. 

Whilst  the  insurance  departments  of  the  various 
states  exercise  supervision  over  the  contracts  issued,  few 
restrictions  are  imposed  upon  the  companies  in  this  re- 
spect. They  are  practically  at  liberty  to  write  any  kind 
of  policy,  provided  it  is  supported  by  a  sufficient  reserve 
to  insure  the  fulfilment  of  its  terms. 

Copyrighted  1916.  by  Pacific  Mutuil  Life  Insurance  Company  of  California 


This  latitude  encouraged  the  issuance  of  a  great 
variety  of  contracts,  some  of  them  calculated  to  lead  to 
misunderstanding,  if  not  actual  deception.  The  abuse  in 
question  is  rarely  committed  now-a-days.  For  many 
years  past  there  has  been  a  general  and  constant  endeavor 
to  render  the  documents  comprising  the  contract  as 
simple  as  possible.  Restrictions  have  been  reduced  to  the 
minimum  consistent  with  conservative  operation,  and 
present  policies  are  almost  invariably  incontestible  after 
one  or  two  years.  One  of  the  important  effects  of  this 
liberality  is  found  in  the  fact  that  for  every  $1,000  paid  in 
claims  not  more  than  $1.00  of  insurance  is  contested  by 
legal  reserve  companies. 

The  policy  contract  of  today,  with  its  great  prepon- 
derance of  advantage  on  the  side  of  the  insured,  is  repre- 
sentative of  the  principles  and  animus  which  control 
modern  Life  Insurance.  They  are  the  outgrowth  of 
gradual  reformative  evolution  which  traces  back  to  an 
early  time  when  the  companies  were  more  concerned  for 
profit  than  for  equity.  Contracts  were  then  laden  with 
conditions  adverse  to  the  assured  and  companies  some- 
times availed  themselves  of  mere  technicalities  to  avoid 
liability.  Public  protest,  remedial  legislation,  keen  com- 
petition and  the  adoption  of  ethical  standards  by  execu- 
tives have  brought  about  a  reversal  of  the  old  order  of 
things.  The  erstwhile  doctrine  of  caveat  emptor,  as  ap- 
plied to  a  Life  Insurance  contract,  has  long  since  been 
abandoned  by  the  best  companies.  The  purchaser  of  a 
latter-day  policy  does  not  need  to  beware  lest  he  be  de- 
ceived. All  the  material  conditions  of  his  agreement 
with  the  company  are  set  forth  precisely  and  clearly. 
His  equities  are  fairly  considered  and  definitely  estab- 
lished. Far  from  endeavoring  to  get  the  better  of  him, 
the  company  voluntarily  grants  him  every  benefit  and 
privilege  to  which  he  is  justly  entitled  and  gives  him  the 
advantage  in  questions  where  the  respective  interests 
of  insurer  and  insured  appear  to  be  evenly  balanced. 

The  early  policy  documents  were  comparatively 
short,  but  by  far  the  greater  portion  of  their  contents 
consisted  of  restrictions  and  the  recital  of  conditions 
under  which  the  protection  would  become  forfeitable. 
In  their  effort  to  gain  popularity  the  companies  discarded 
the  prohibitive  provisions  by  degrees.  The  same  motive, 
augmented  by  compulsory  legislation,  led  to  a  constant 

86 


increase  of  the  stipulated  benefits.  Ninety  per  cent,  of 
the  clauses  of  the  present  policy  are  drawn  in  favor  of  the 
insured.  Indeed,  "liberality"  in  this  respect  has  been  ex- 
ercised to  an  injudicious  extent  and  there  is  a  tendency 
toward  conservative  reaction,  prompted  by  the  sound 
consideration  that,  in  the  final  analysis,  the  whole  body 
of  policyholders  compose  "the  company,"  and  all  matters 
affecting  them  should  be  regulated  by  regard  for  the  wel- 
fare of  the  majority.  If  this  principle  is  logically  pur- 
sued the  policies  of  the  future  will  offer  fewer  induce- 
ments to  new  insurants  and  better  returns  to  established 
policyholders. 

INTEREST  IN  THE  POLICY 

The  title  of  a  policy  may  vest  in  the  insured  or  in  the 
beneficiary,  depending  upon  the  terms  and  conditions 
of  the  contract.  Formerly,  a  personal  beneficiary,  having 
been  named  in  a  policy  contract,  could  not  be  changed 
without  the  consent  of  the  beneficiary.  At  the  present 
time  most  policies  are  written  with  reservation  to 
the  insured  of  the  right  to  revoke  the  beneficiary  at  will. 
This  modification  of  general  practice  was  brought  about 
by  popular  demand,  probably  prompted  by  desire  to 
facilitate  borrowing  on  policies. 

To  quote  Fouse:  "If  the  insured  under  the  terms  of 
the  contract  has  the  right  to  change  the  beneficiary,  then 
the  latter  has  a  contingent  interest,  only,  which  does  not 
become  vested  until  after  the  death  of  the  insured.  Hence 
under  such  a  contract  the  title  vests  in  the  insured  be- 
cause he  can,  at  any  time,  substitute  his  own  estate  or 
another  beneficiary  for  the  one  originally  named.  If, 
however,  under  the  terms  of  the  contract  the  insured 
cannot  change  the  beneficiary,  then  the  title  to  the  policy 
vests  in  the  latter  and  can  only  be  transferred  to  another 
by  assignment. 

"Under  the  laws  of  most  of  the  states  a  policy  for  life 
insurance  made  payable  to  wife  and  children  is  not  liable 
for  the  debts  of  the  insured,  and  hence,  though  the  in- 
sured be  insolvent  at  the  time  of  death,  the  creditors 
cannot  get  any  part  of  the  insurance  money  unless  it  can 
be  shown  that  the  policy  was  contracted  for  after  insol- 
vency and  the  contract  was  made  to  avoid  the  payment 
of  debts  and  to  defraud  creditors. 

87 


"It  is  an  established  principle  of  the  courts  to  con- 
strue contracts  against  the  framers  or  makers,  on  the 
ground  that  they  are  familiar  with  the  technicalities  of 
the  law,  and  are  presumed  to  frame  contracts  in  their 
own  interest.  In  construing  contracts,  in  case  of  ap- 
parent conflict  between  written  and  printed  clauses,  pref- 
erence is  always  given  to  the  written  clauses." 

The  following  summary  of  general  policy  conditions 
indicates  the  practice  of  the  majority  of  companies: 

A  copy  of  the  application  is  attached  to  the  policy 
so  that  the  insured  may  be  in  possession  of  the  complete 
contract. 

The  policy  contains  a  clause  setting  forth  that  it 
shall  not  go  into  force  and  effect  until  delivered  during 
the  life  time  and  good  health  of  the  insured,  and  after 
the  required  premium  has  actually  been  paid. 

The  majority  of  companies  have  some  restrictions  re- 
lating to  hazardous  occupations  during  the  first,  or  first 
two  policy  years. 

Most  companies  have  some  restrictions  pertaining  to 
military  and  naval  service  during  war. 

Practically  every  policy  contains  a  suicide  clause  in 
one  or  another  form. 

The  policy  becomes  incontestable  after  one  or  two 
years. 

Provision  for  reinstatement  of  lapsed  policies  is  made 
under  varying  conditions. 

Thirty-one  days'  grace  is  allowed  in  the  payment  of 
every  premium  after  the  first. 

Participating  policies  contain  a  clause  stating  the 
conditions  under  which  dividends  wrill  be  paid. 

Every  policy  embraces  a  table  specifically  indicating 
the  surrender  values  and  loans  available  in  each  year, 
generally  beginning  wTith  the  third. 

Most  companies  undertake  to  pay  claims  immediate- 
ly after  the  receipt  of  proofs  of  death. 

THE  APPLICATION  AND  EXAMINATION 

A  contract  in  law  is  based  upon  an  offer  and  its  ac- 
ceptance. In  an  insurance  contract  the  former  is  rep- 
resented by  the  application,  of  which  the  medical  exam- 
ination is  a  part,  and  the  latter  by  the  issuance  of  the 
policy.  The  overtures  of  the  agent  are  merely  in  the 

88 


nature  of  a  proposal  or  suggestion.  Applicants  frequent- 
ly have  a  distorted  idea  of  the  transaction  and  resent 
declination  as  the  withdrawal  of  an  offer. 

The  application  form  usually  contains  certain  state- 
ments which  are  deemed  warranties.  In  some  instances 
they  are  accepted  merely  as  representations  made  in  good 
faith.  In  either  case  deliberate  misstatement  of  a  fact 
material  to  the  contract  wrould  necessarily  constitute 
fraud  and  void  the  policy  if  availed  of  during  the  con- 
testable  period. 

The  medical  examination  consists  of  certain  physical 
tests,  and  replies  by  the  applicant  to  a  series  of  ques- 
tions referring  to  his  family  history  and  personal  health, 
past  and  present.  These  replies  are  part  of  the  consid- 
eration on  which  the  contract  is  based. 

All  rejections  become  matters  of  record,  even  though 
they  result  from  trial  examinations,  applications  for  re- 
instatement, etc.  The  statistics  of  Life  Insurance  com- 
panies indicate  that  about  10  per  cent  of  all  applications 
are  declined. 

POLICY  CONDITIONS 

In  their  main  features  the  contracts  of  leading  com- 
panies are  very  similar.  An  understanding  of  policy  con- 
ditions will  be  readily  gained  by  a  study  of  a  specimen 
Pacific  Mutual  contract  in  conjunction  with  the  follow- 
ing explanation,  of  the  several  clauses. 

The  Pacific  Mutual  contract  begins  by  a  statement 
of  the  Company's  promise  made  in  consideration  of  the 
payment  of  the  first  and  succeeding  premiums,  and  of 
the  application,  "a  copy  of  which  is  hereto  attached." 
Technically,  the  application  consists  of  the  form  filled 
by  the  agent  and  that  portion  of  the  Medical  Examiner's 
report  to  which  the  applicant  subscribes.  Photographic 
copies  of  both  are  included  in  the  policy.  Thus  the  in- 
sured is  furnished  with  a  complete  contract,  in  the  form 
of  all  the  documents  involved  in  the  elements  of  offer 
and  acceptance. 

Then  follows  a  clause  relieving  the  Company  from 
liability  on  account  of  Permanent  Total  Disability  after 
the  insured  has  reached  the  age  of  sixty  years,  and  agree- 
ing, otherwise,  to  make  certain  payments  on  this  account, 
"as  provided  on  the  succeeding  pages  of  this  policy." 

89 


"The  first  year's  insurance  under  this  policy  is  Term 
insurance."  An  explanation  of  this  method  of  providing 
for  the  expense  of  new  business  was  given  in  a  preceed- 
ing  paper. 

The  succeeding  clause  confers  on  the  insured  the 
right  to  change  the  beneficiary  at  will,  but  provides  that 
"such  change  shall  take  effect  upon  the  endorsement  of 
the  same  on  the  policy  by  the  Company,  and  not  before." 

Incontestability.  The  contracts  of  the  Pacific  Mutual 
become  incontestable  after  one  year,  save  for  two  causes, 
to-wit:  the  non-payment  of  premiums,  and  violation 
of  the  conditions  relating  to  naval  and  military  service. 

A  further  consideration  is  that  in  the  event  of  the 
insured  committing  suicide  within  one  year  from  the 
date  of  the  policy,  the  Company's  liability  shall  be  lim- 
ited to  the  amount  of  premiums  paid. 

The  majority  of  companies  make  their  policies  incon- 
testable after  one  year,  but  in  many  cases  there  are  more 
exceptions  than  in  the  Pacific  Mutual  contract.  En- 
couraged, probably,  by  the  long  period  of  peace  through 
which  this  country  has  passed,  several  otherwise  con- 
servative companies  have  taken  the  highly  questionable 
step  of  removing  all  restrictions  regarding  military  and 
naval  service.  The  diplomatic  complications  with  Japan 
a  few  years  ago,  the  present  difficulties  with  Mexico,  and 
the  European  conflict  of  today  prove  that  the  war  hazard 
is  one  which  no  American  Life  Insurance  company  can 
afford  to  treat  lightly.  At  the  time  of  our  Civil  War 
and  the  Franco-Prussian  War,  but  a  small  proportion  of 
the  men  in  any  community  carried  insurance.  At  this 
day  a  large  percentage  of  any  American  military  force 
exposed  to  the  disease  and  carnage  incident  to  war  would 
be  policyholders.  The  restriction  in  the  Pacific  Mutual 
policies  is,  therefore,  a  wise  and  foresighted  provision. 

The  paragraph  referring  to  "Statements"  has  been 
covered  in  the  disscussion  of  the  Application. 

The  provision  for  adjustment  of  the  claim  in  case 
of  misstatement  of  age  may  work  to  the  advantage  of 
the  insured,  as  well  as  adversely.  In  either  case  he  will 
receive  the  exact  amount  of  insurance  or  cash  to  which 
his  premiums  entitle  him. 

The  thirty-one  days'  grace,  without  interest  charge, 
allowed  in  the  payment  of  premiums  is  a  measure  de- 
signed to  diminish  lapse.  The  policyholder  should  re- 

90 


sort  to  this  privilege  only  in  case  of  necessity.  By  avail- 
ing himself  of  it  every  year  he  would  practically  enjoy 
the  benefit  of  it  but  once. 

The  conditions  pertaining  to  Loans  conform  closely 
to  the  general  practice  of  the  most  libeial  companies. 
A  number  of  Eastern  companies  make  policy  loans  at 
5  per  cent,  and  should  be  glad  to  do  so  in  view  of  the 
fact  that  the  rate  of  interest  earned  on  their  mean  in- 
vested assets  is  generally  less  than  this  figure.  The  Pa- 
cific Mutual,  on  the  other  hand,  which  loans  to  policy- 
holders  at  6  per  cent.,  is  securing  a  higher  rate  on  its 
funds,  and  so  makes  a  sacrifice  in  lending  to  policyhold- 
ers  at  a  lower  rate.  In  taking  out  a  policy  it  is  obviously 
of  greater  consequence  to  a  man  to  be  assured  of  a  high 
rate  of  interest  on  his  Reserve  throughout  the  policy 
period  than  to  be  guaranteed  a  slightly  lower  rate  in  the 
improbable  contingency  of  his  becoming  a  borrower. 

Participation  in  Dividends.  The  Participating  policy 
forms  provide  for  the  payment  or  credit  of  dividends 
annually,  which  is  thai  only  manner  in  which  the  Pacific 
Mutual  distributes  them.  The  first  dividend  is  due  at 
the  end  of  the  first  year,  provided  the  second  premium  is 
paid.  The  payment  of  a  dividend  at  the  end  of  the  first 
year  without  this  restriction  would  be  reckless  liberality 
toward  a  lapsing  policyholder  at  the  expense  of  more 
persistent  members.  Succeeding  dividends  are  payable 
unconditionally.  The  clauses  relating  to  the  subject 
enumerate  several  ways  in  which  dividends  may  be  used. 

In  the  Non-Participating  policy  forms  the  insured  is 
reminded  that  he  is  not  entitled  to  share  in  the  surplus 
earnings  of  the  Company. 

In  the  Income  contracts  provision  is  made  for  the  con- 
tinuation of  dividends  derived  from  excess  interest  earn- 
ings after  the  policy  has  become  a  claim. 

Non-Forfeiture  Values.  The  provisions  under  this 
head  are  practically  the  same  as  those  in  the  contracts 
of  other  companies  operating  on  a  similar  reserve  basis. 
Nearly  every  company  makes  a  surrender  charge.  In  a 
few  cases  it  is  less  than  that  of  the  Pacific  Mutual,  whilst 
in  a  number  it  is  considerably  greater..  The  justice  of 
penalizing  a  man  who  abrogates  his  contract,  in  favor 
of  those  who  maintain  their  agreements  with  the  Com- 
pany, is  patent. 

The  figures  in  the  table  of  Loan  and  Non- Forfeiture 

91 


Values  have  been  made  with  allowance  for  the  surrender 
charge.  They  represent  the  net  amounts  of  cash  and 
paid-up  insurance  and  the  period  of  Term  insurance 
available  to  the  policyholder,  except  for  any  liens  or 
credits  that  may  exist. 

A  policyholder  securing  a  loan  is  required  to  dis- 
charge any  unpaid  balance  of  the  current  year's  premium, 
to  pay  interest  on  the  loan  in  advance  to  the  next  anni- 
versary date  of  the  policy,  and  to  pay  interest  in  advance 
thei  eaf  ter. 

The  Company  reserves  the  right  to  defer  the  making 
of  a  policy  loan  (except  for  the  purpose  of  paying  pre- 
miums) or  the  payment  of  a  cash  surrender  value  for 
sixty  days  after  the  insured  shall  have  made  application. 
This  is  a  safety  provision  required  by  the  laws  of  some 
states.  The  Company  would  resort  to  it  only  under  the 
most  unusual  conditions. 

Restoration.  A  valuable  condition  is  inserted  under 
this  head.  Within  five  years  of  lapse,  a  policy  may  be 
reinstated  by  the  payment  of  past  due  premiums  with 
interest,  provided  the  holder  submits  evidence  of  insur- 
ability satisfactory  to  the  Company. 

Instalment  Benefits.  Practically  all  Pacific  Mutual 
contracts,  and  those  of  most  leading  companies,  provide 
for  the  payment  of  claims  in  instalments  under  various 
conditions.  This,  independently  of  the  regular  income 
contracts. 

Permanent  Total  Disability.  This  is  a  comparatively 
new  form  of  protection  which  a  number  of  companies 
have  not  yet  incorporated  in  their  contracts,  though  there 
is  a  decided  tendency  toward  its  general  adoption.  The 
feature  is  growing  fast  in  popular  appreciation  and  the 
majority  of  prominent  companies  now  include  it  in  their 
policy  contract.  The  conditions  vary,  the  Pacific  Mu- 
tual clause  representing  the  extreme  of  liberality. 

Permanent  Total  Disability  benefits  are  granted  with 
all  Pacific  Mutual  policies,  excepting  Joint  and  Term 
contracts.  Under  forms  other  than  the  Monthly  Income 
and  Corporation  such  benefits  are  payable  in  ten  equal 
instalments  of  one-tenth  of  the  amount  payable  under 
the  policy  as  a  death  claim.  The  first  instalment  is  pay- 
able immediately  upon  acceptance  of  satisfactory  proofs, 
and  subsequent  instalments  are  payable  annually  there- 
after. 

92 


It  is  provided  that  this  benefit  shall  be  available  only 
while  the  policy  is  in  full  force  and  effect — that  is,  with- 
out any  premiums  being  in  default — and  on  the  condi- 
tion that  the  insured  shall  not  have  reached  the  age  of 
sixty  years  at  the  time  of  the  disability.  The  benefit 
shall  not  accrue  in  case  the  policy  is  continued  in  force 
through  the  application  of  one  of  the  non-forfeiture 
values;  that  is,  paid-up  or  extended  Term  insurance. 
Where,  under  a  limited  payment  contract,  all  the  pre- 
miums required  have  been  paid,  the  Permanent  Total 
Disability  benefits  are  still  applicable. 

In  order  to  secure  this  benefit  the  insured  must  be 
permanently  and  totally  disabled  so  that  he  is  unable 
to  engage  in  any  remunerative  occupation.  Disability 
resulting  from  insanity,  or  from  any  disease  complicated 
with  insanity,  is  not  covered.  The  absolute  loss  of  eye- 
sight or  the  amputation  of  both  hands  at  or  above  the 
wrists,  or  the  amputation  of  both  feet  at  or  above  the 
ankles,  or  the  amputation  of  one  entire  hand  and  one 
entire  foot,  according  to  the  terms  of  the  policy,  consti- 
tute Permanent  Total  Disability,  even  though  the  as- 
sured may  be  able  to  engage  in  some  remunerative  oc- 
cupation. 

In  case  the  insured  dies  before  the  ten  annual  instal- 
ments are  paid  under  the  Disability  Benefit  the  balance 
of  such  ten  instalments  will  be  paid  in  one  sum  to  the 
beneficiary  or,  if  there  is  no  beneficiary,  to  the  estate  of 
the  insured. 

The  payment  of  a  disability  claim  cancels  all  other 
benefits  under  the  policy,  and  also  entails  the  remission 
of  all  premiums.  Therefore,  after  the  commencement 
of  the  payment  of  the  instalments,  there  are  no  further 
dividends,  nor  are  there  any  cash,  loan  or  other  surren- 
der values. 


93 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

IX 

8 1 .  Name  the  usual  parties  to  a  Life  Insurance  contract. 

The  Insurer,  being  the  company  which  issues  the  con- 
tract. The  Insured,  the  person  upon  whose  life  it  is 
insured.  The  Beneficiary,  the  person  to  whom  the 
claim  is  made  payable. 

82.  The  insurance   departments  permit   the  issuance   of 
practically   any    kind    of   policy  upon   one    essential 
condition.     What  is  that  condition? 

Provision  for  a  sufficient  reserve  to  insure  the  ful- 
fillment of  the  contractual  guarantees. 

83.  What  is  the  proportional  amount  of  insurance  con- 
tested to  that  paid  in  claims? 

One  dollar  of  the  former  to  one  thousand  dollars  of 
the  latter. 

84.  Under  the  form  of  policy  granting  the  right  of  re- 
vocation what  kind  of  interest  has  the  beneficiary? 

A  contingent  interest  only. 

85.  Under  what  conditions,  only,  may  creditors  attach 
the  proceeds  of  a  policy  payable  to  a  wife? 

When  it  can  be  shown  that  the  policy  was  secured 
whilst  the  insured  was  insolvent. 


86.  In  case  of  conflict  of  statement  between  the  written 
and  printed  clauses  of  a  contract,  to  which  is  pref- 
erence given? 

Invariably  to  the  printed  clauses. 

87.  What  constitutes  a  Life  Insurance  application  in  the 
technical  sense? 

The  form  procured  by  the  agent  which  is  commonly 
termed  "the  application"  and  that  portion  of  the  ex- 
amination form  which  consists  of  the  applicant's 
answers  to  questions  put  by  the  examiner. 

88.  If  an  application  for  the  reinstatement  of  a  policy 
should  be  declined  by  the  company  would  the  fact 
become  a  matter  of  record  ? 

Rejections  of  all  kinds,  even  though  growing  out  of 
trial  examinations,  become  matters  of  record. 

89.  What  effect  upon  a  policy  claim  has  a  misstatement 
of  age? 

The  amount  of  the  claim  is  adjusted  so  as  to  secure 
to  the  beneficiary  the  precise  sum,  whether  more  or 
less  than  that  provided  for  in  the  policy  which  the 
premiums  paid  would  have  purchased  at  the  correct 
age. 

90.  Does  the  Permanent  Total  Disability  provision  re- 
main in  force  under  a  policy  on  which  all  premiums 
have  been  paid? 

It  does  until  the  insured  shall  have  reached  the  limit 
of  age  for  this  protection. 


Hegal  JXesierbe  Companies  Classified 

BY  FORBES  LINDSAY 

The  preceding  papers  have  treated  of  the  principles 
underlying  Legal  Reserve  Life  Insurance  and  the  meth- 
ods of  its  operations.  The  essential  features  have  been 
explained,  obviating  the  necessity  of  a  formal  description 
of  the  System.  It  will  suffice  to  summarize  the  particulars 
in  which  it  is  chiefly  distinguished  from  the  counter- 
system  termed  Assessment  Insurance. 

The  main  requirement  of  Legal  Reserve  Life  Insur- 
ance is  the  maintenance  of  a  reserve  adequate  to  the 
discharge  of  all  contractual  obligations.  As  a  consequence 
of  this  condition  the  Legal  Reserve  company  is  enabled 
and  permitted  by  law  to  make  its  contracts  in  the  form 
of  guarantees.  The  same  resource  gives  it  the  ability 
to  charge  stipulated  level  premiums  and  to  assure  definite 
benefits.  It  is  subjected  to  rigid  tests  of  solvency  which 
can  be  satisfied  only  by  strict  compliance  with  the  Legal 
Reserve  laws  and  conservative  management. 

There  are  four  classes  of  Legal  Reserve  companies, 
distinguished  mainly  by  their  manner  of  control,  to-wit: 
Stock;  Mutual;  Mutual,  with  guaranty  capital;  and 
Mixed. 

Stock  companies  are  those  which  have  capital  stock 
and  which  do  not  issue  Participating  insurance. 

In  Mutual  companies  the  policyholders  own  the  as- 
sets, share  in  the  savings,  or  "profits,"  and,  theoretically 
at  least,  control  the  corporation. 

The  third  class  is  virtually  the  same  as  the  second. 
The  slight  technical  difference  between  them  is  pointed 
out  in  order  to  explain  the  apparent  anomaly  of  a  purely 
mutual  company  with  stock  capital.  Many  mutual 
companies  began  business  with  a  guaranty  capital,  the 
purpose  of  which  was  to  provide  for  adverse  contingen- 
cies during  the  early  years  when  but  little  surplus  could 
be  accumulated.  Generally,  it  was  provided  that  this 
stock  should  draw  a  preferential  dividend  of  seven  per 

Copyrighted  1916.  by  Pacific  Mutual  Life  Insurance  Company  of  California 


cent,  and  that  a  certain  portion  of  the  future  surplus 
should  be  set  aside  for  the  purpose  of  retiring  the  stock 
at  par  value.  The  retirement  was  to  be  effected  by  the 
vote  of  the  policyholders.  During  the  continuance  of  the 
stock,  half  of  the  directors  were  elected  by  the  owners 
of  it  and  half  by  the  policyholders.  In  a  few  cases  the 
guaranty  capital  under  which  mutual  companies  entered 
into  business  is  still  maintained. 

It  is  somewhat  difficult  to  define  the  difference  be- 
tween the  foregoing  class  and  that  which  is  termed 
Mixed  companies.  Dawson,  in  "The  Business  of  Life 
Insurance,"  puts  it  thus:  "Are  the  shareholders  inter- 
ested, directly  or  indirectly,  by  way  of  cash  dividend  or 
otherwise,  in  the  profits  of  the  company  beyond  a  certain 
fixed  or  limited  dividend?  If  not  so  interested  it  is  a 
mutual  company  with  guaranty  capital ;  if  so  interested, 
a  mixed  company,  i.  e.,  a  stock  company  which  issues 
participating  policies/'  Alexander,  in  "The  Life  Insur- 
ance Company,"  says :  "A  company  conducted  accord- 
ing to  the  mixed  method  has  a  capital. .  *  *  *  It  offers 
its  insurance  on  the  participating  plan.  That  is  to  say. 
the  premium  charged  usually  corresponds  with  that 
charged  by  the  Mutual  company ;  and  dividends  are 
similarly  returned  to  the  policyholder ;  but  the  company 
does  not  agree  to  pay  all  the  divisible  profits  to  its 
policyholders ;  it  reserves  a  portion  for  the  shareholders 
who  are  the  owners  of  the  capital  stock.  Thus  it  will  be 
seen  that  the  Mixed  company  conducts  its  business  sub- 
stantially on  the  mutual  plan,  although  only  a  part  of 
the  profits  go  to  the  policyholders,  and  although  the 
government  is  like  that  of  the  Stock  company." 

After  consideration  of  the  foregoing  definitions  we 
shall  be  justified  in  reaching  the  conclusion  that  the  only 
important  distinction  between  the  several  classes  of 
Legal  Reserve  companies  is  represented  by  the  Stock 
and  Mutual  concerns.  It  is  equally  true  that  the  only 
essential  difference  between  them  lies  in  the  issuance 
of  Participating  and  Non-participating  forms  of  insur- 
ance. In  the  matter  of  control,  as  we  shall  see  presently, 
the  difference  is  theoretical  rather  than  practical. 

The  earliest  Life  Insurance  companies  were  Stock  cor- 
porations which  fixed  their  premiums  at  excessively  high 
figures.  Mutual  companies  shortly  entered  the  field, 
offering  Participating  insurance  at  rates  considerably 

98 


lower  than  those  of  the  Stock  companies.  The  natural 
result  was  to  compel  the  latter  to  reduce  their  premiums, 
a  movement  which  was  continued  under  competition 
until  the  practical  limit  of  reduction  has  been  reached. 
The  relative  merits  of  Participating  and  Non-participat- 
ing insurance  have  been  discussed  in  a  preceding  paper. 
It  need  only  be  added  that  insurance  of  both  kinds  is 
now  sold  at  prices  probably  approaching  more  closely  to 
actual  cost  than  is  the  case  with  any  other  commodity  in 
general  demand. 

It  must  be  understood  that  both  Stock  and  Mutual 
companies  may  sell  Participating  and  Non-participating 
insurance.  The  right  of  purely  Mutual  companies  to 
issue  policies  of  the  latter  kind  has  been  formally  dis- 
puted, but  never  subjected  to,  legal  test.  In  practice, 
however,  the  two  types  of  companies  generally  confine 
themselves  to  the  class  of  insurance  appropriate  to  the 
principles  which  they  represent  respectively. 

In  a  few  instances,  as  in  the  case  of  the  Pacific  Mutual, 
a  Stock  company  pursues  both  branches  of  the  business 
impartially.  When  the  expenses  of  the  two  classes  of 
insurance  and  the  results  of  the  operations  are  separately 
accounted  for  and  appropriated  with  strict  equity,  we 
have,  in  effect,  two  companies  under  one  management. 

The  question  of  control  does  not  deserve  the  promi- 
nence which  is  sometimes  given  to  it  by  advocates  of  one 
or  the  other  systems.  It  seems  reasonable  to  assume,  and 
experience  warrants  the  assumption,  that  the  manage- 
ment of  a  Life  Insurance  company  in  the  hands  of  direc- 
tors elected  by  shareholders  will  be  carried  on  with,  at 
least,  the  honesty  and  efficiency  that  characterizes  the 
conduct  of  corporations  in  general.  But,  in  the  case  of 
the  former,  we  have  exceptional  safeguards  in  the  form 
of  the  keenest  competition  and  the  closest  supervision 
by  governmental  authorities. 

Although  the  administration  of  a  Mutual  Life  Insur- 
ance company  is  theoretically  subject  to  the  direction  of 
the  policyholders,  as  a  matter  of  fact  but  a  very  small 
proportion  of  any  such  body  ever  exercises  an  influence 
in  the  matter.  Under  the  most  liberal  system  of  proxy 
voting  comparatively  few  holders  of  policies  are  rep- 
resented at  an  election,  and  the  officers  rarely  experience 
any  difficulty  in  commanding  a  majority  of  votes. 

Gross  mismanagement  of  a  Stock  or  Mutual  company 

99 


would  certainly  result  in  a  change  of  administration, 
through  the  combined  action  of  the  interested  policy- 
holders  and  the  immediately  responsible  insurance  de- 
partment. Ordinary  incompetence  might  be  tolerated 
for  a  time,  but  could  not  long  continue  under  the  present 
competitive  conditions  and  the  latter-day  force  of  public 
opinion. 

INDUSTRIAL  LIFE  INSURANCE 

Hoffman  states,  with  truth,  that  "Industrial  insurance 
is  today  the  most  widely  diffused  form  of  thrift  in  this 
and  other  English-speaking  countries.  While  at  best  and 
at  most  it  is  but  a  means  of  providing'  a  relatively  small 
sum  of  money  for  certain  needs  in  the  event  of  the  death 
of  the  insured,  its  educational  value  as  a  method  of  em- 
phasizing the  utility  of  periodical  savings  is  enormous, 
affecting  as  it  does  the  life  and  well-being  of  millions 
of  wage-earners  and  their  families.  Industrial  insurance 
is  today  a  social  institution  of  great  importance,  not  only 
to  the  individual,  but  equally  to  society  and  the  State, 
as  making  slowly  but  surely  for  a  higher  standard  of  life 
and  security  against  the  uncertainties  of  the  future." 

There  were,  at  the  close  of  the  year  1914,  more  than 
31,000,000  industrial  policies  in  force,  representing  up- 
wards of  $4,000,000,000  of  insurance.  This  enormous 
business  has  been  built  up  since  1.875,  when  Industrial 
Insurance,  modeled  on  the  pre-existing  British  system, 
was  introduced  in  America.  Whilst  there  are  29  com- 
panies writing  this  class  of  insurance  in  the  United 
States,  about  95  per  cent,  of  the  entire  business  is  trans- 
acted by  the  Metropolitan,  Prudential  and  John  Hancock 
insurance  companies. 

Approximately  $50,000,000  are  paid  in  claims  yearly 
by  the  Industrial  companies,  the  distribution  extending 
to  half  a  million  beneficiaries  among  the  lower  orders. 
The  primary  object  of  this  class  of  protection  is  to  pro- 
vide a  burial  fund  for  every  member  of  the  wage-earner's 
family.  The  age  limits  of  insurability  are  from  birth  to 
seventy  years,  and  no  distinctions  are  made  on  account  of 
sex. 

Industrial  is  distinguished  from  "ordinary"  insurance 
chiefly  by  the  small  amounts  of  the  policies ;  by  weekly 
premiums  which  are  collected  from  the  insured  by  agents ; 

100 


and  by  the  fact  of  the  amount  insured  being  adjusted  to 
the  premium,  which  is  the  reverse  of  the  regular  practice. 
The  unit  of  Industrial  insurance  is  a  five  cent  premium ; 
that  of  "ordinary"  insurance  a  $1,000  death  indemnity. 

To  quote  the  late  John  F.  Dryden,  President  of  the 
Prudential  Insurance  Company: 

"The  calculation  of  premium  charges  for  both  infan- 
tile and  adult  risks  is  upon  an  actuarial  basis  derived  from 
trustworthy  mortality  tables.  The  premiums  vary  with 
age,  but  there  are  practically  no  restrictions  as  to  occu- 
pations or  residence.  Careful  inquiry  is  made  as  to  the 
moral  character  of  the  risks  assumed. 

"The  collection  of  premiums  from  the  houses  of  the  in- 
sured is  made  by  authorized  collectors,  or  agents,  who  are 
under  a  most  effective  system  of  supervision,  supplement- 
ed by  an  audit  system  of  weekly  accounts  and  debits  and 
credits,  by  which  defalcation,  fraud,  and  intentional 
errors  are  made  difficult  and,  generally  speaking,  im- 
posible.  Every  policyholder  has  a  premium  receipt  book 
in  which  the  weekly  payments  must  be  entered  by  the 
agent,  while  at  the  same  time  a  corresponding  entry  is 
required  to  be  made  in  the  agent's  collection  book.  The 
system  has  worked  so  well  that  during  the  half-century 
since  Industrial  insurance  has  been  in  operation  no  im- 
portant alterations  have  been  made  in  this  branch  of 
office  practice. 

"To  every  person  insured  a  policy  is  issued  which  in 
all  essentials  conforms  to  the  contract  issued  to  ordinary 
policyholders.  The  language  used  is  so  plain  and  free 
from  confusing  technicalities  that  it  is  seldom,  indeed, 
that  there  are  controversies  or  misunderstandings  be- 
tween the  company  and  the  insured.  The  contract  pro- 
vides for  a  definite  sum  payable  in  the  event  of  death 
in  return  for  a  definite  weekly  premium,  but  in  addition 
certain  privileges  and  options  are  granted  to  the  insured, 
which  provide  for  a  paid-up  policy  after  three  years,  for 
aditional  benefits  after  five  years,  for  cash  dividends  after 
fifteen  years,  and  for  cash  surrender  value  after  twenty 
yeai  s. 

"Every  policy  contains  a  provision  that  all  premiums 
must  be  paid  in  advance  on  the  Monday  of  the  week  for 
which  they  are  due.  In  the  event  of  a  policy  being  more 
than  four  weeks  in  arrears  for  non-payment  of  premiums, 
the  agent  is  required  to  report  the  policy  for  lapse.  Most 

101 


of  the  lapses  of  Industrial  policies  occur  during  the  early 
weeks  of  policy  duration,  when  only  a  few  premiums  have 
been  paid.  Policies  can  be  revived  without  difficulty 
provided  the  arrears  do  not  exceed  one  year,  but  it  is 
required  that  the  applicant  for  revival  pass  a  medical  ex- 
amination, or  furnish  other  evidence  of  being  in  good 
health.  There  are  no  fines  and  every  facility  is  afford- 
ed to  keep  the  policy  in  force.  If  the  arrears  exceed  thir- 
teen weeks  the  policy  may  be  revived  without  the  pay- 
ment of  arrears,  but  in  place  thereof  a  non-interest-bear- 
ing lien  will  be  issued,  the  amount  of  which  is  deducted, 
in  the  event  of  death,  from  the  face  value  of  the  policy. 

"In  the  event  of  death,  every  effort  is  made  to  pay  the 
claim  as  soon  as  possible  to  carry  into  effect  the  general 
intent  of  Industrial  insurance,  to  provide  for  the  burial 
expenses  of  the  insured.  The  proof  of  death,  however, 
requires  to  be  supplemented  by  documentary  evidence: 
(a)  claimant's  certificate;  (b)  certificate  of  identity; 
(c)  certificate  of  the  superintendent  or  assistant  superin- 
tendent; (d)  certificate  of  the  undertaker;  (e)  cer- 
tificate of  the  attending  physician. 

"The  agency  system  of  industrial  companies  is  in  a 
measure  unique  and  deserving  of  special  mention.  A 
large  number  of  agents  are  necessarily  required  to  con- 
duct the  office  and  field  operations  of  a  company  insuring 
millions  of  risks,  for  I  may  say  in  passing  that  95  per  cent. 
of  the  entire  Industrial  business  is  carried  on  by  three 
companies.  The  office  organization  consists  of  a  large 
number  of  departments,  which  cannot  very  well  be  dealt 
with  on  this  occasion.  The  field  operations  require  a 
superintendent  in  charge  of  a  district,  who  has  the  as- 
sistance of  a  number  of  assistant  superintendents,  under 
whom  is  an  agency  force  that  varies  in  number  according 
to  the  size  of  the  territory.  On  the  average  an  agent 
collects  from  about  five  hundred  to  six  hundred  policy- 
holders,  but  his  compensation  is  so  adjusted  that  it  is 
necessary  for  him  in  addition  to  solicit  for  new  business. 
By  this  means  it  is  to  his  pecuniary  interest  to  prevent 
the  lapsing  of  policies  and  to  increase,  as  far  as  possible, 
the  number  of  policies  in  force.  The  amount  of  collect- 
ible premiums  is  called  the  "debit,"  and  the  agent  is  held 
responsible  for  the  condition  of  his  accounts.  His  books 
and  papers  are  periodically  inspected  by  assistant  super- 
intendents, who  have  a  thorongh  knowledge  of  the  busi- 

102 


ness  and  are  personally  familiar  with  all  the  insured,  so 
that  in  the  event  of  the  resignation  or  death  of  the  agent 
there  is  no  interruption  or  intermission  in  the  collection 
of  the  weekly  premiums." 

Since  the  papers  from  which  the  foregoing  material 
was  extracted  were  written,  the  following  improvements 
have  been  made  in  the  Industrial  policy: 

(a)  Policies  are  now  issued  on  the  Twenty  Payment 
Life,  Twenty  Year  Endowment,     and    Weekly     Income 
plans ;    whereas,  formerly,  the  Whole  Life  contract  was 
the  only  one  written. 

The  Weekly  Income  policy  provides  that,  instead  of 
a  lump  sum  payment  at  the  death  of  the  insured,  his 
beneficiary  shall  receive  a  certain  sum  each  week  for  a 
period  of  26  weeks. 

(b)  The  present  policies  are  payable  for  half  the  bene- 
fit at  once  and  the  full  amount  after  six  months.    Paid-up 
or  Extended  Insurance  is  granted  upon  surrender  after 
the  contract  has  been  in  force  for  three  years.    Cash  value 
is  allowed  after  10  years. 

Under  former  policies  dividends  were  paid  in  cash 
after  15  years.  The  present  practice  is,  after  10  years,  to 
credit  dividends  in  reduction  of  premiums. 

For  further  information  on  this  subject  see  "Indus- 
trial Insurance,"  by  John  F.  Dryden ;  "Yale  Readings  in 
Insurance,  Life;"  "Industrial  Insurance,"  Frederick  L. 
Hoffman;  The  American  Academy  of  Political  and  So- 
cial Science,  Insurance;  The  History  of  the  Prudential 
Assurance  Company  of  London,  (1880)  ;  "Inception  and 
Early  Problems  of  Industrial  Insurance,"  Insurance 
Monitor. 


103 

S-129 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

X 

91.  Name    the    four    classes    of    Legal    Reserve    com- 
panies. 

Stock;  Mutual;  Mutual,  with  guarantee  capital;  and 
Mixed. 

92.  What    are    the    chief    differences    between    Stock 
and  Mutual  companies? 

In  the  former  the  control  and  ownership  are  com- 
pletely in  the  hands  of  stockholders  but  in  the  latter 
the  control  is  held  by  the  policyholders  to  whom  all 
"profits"  or  surplus  belong. 

93.  In   actual  practice  what  is  the   only   essential  dif- 
ference between  Stock  and  Mutual  companies? 

The  issuance  by  the  former  of  Non-participating  in- 
surance and  by  the  latter  of  Participating  insurance 
as  a  rule. 

94.  Proxy-voting    having   been    proved    an    ineffective 
method  of  representation,  what  is  the  chief  safe- 
guard of  policyholders? 

The  Insurance  Departments  which  may  be  relied 
upon  to  detect  and  check  mismanagement  at  an  early 
stage. 

95.  How    many    industrial    policies    were    in    force    in 


1914  and  how  much  insurance  did  they  repre- 
sent? 

Policies,  31,000,000— Insurance  $4,000,000,000. 

96.     What  are  the  chief  characteristics   of   Industrial  In- 
surance ? 

Small  amounts  of  policies;  premiums  payable  weekly 
and  collected  by  agents;  the  unit  is  the  premium  and 
not  the  amount  of  the  policy,  as  in  "ordinary"  in- 
surance. 

97.  What  are  the   age   limits   of  insurability  in  Indus- 
trial Insurance? 

From  birth  to  age  70. 

98.  What  is   the   general   purpose    or   intent   of  Indus- 
trial Insurance? 

To  furnish  means  to  meet  the  expense  of  burial. 

99.  On  what  forms  of  contract  is  Industrial  Insurance 
now  issued? 

Whole  and  Limited  Payment  Life,  Endowment,  and 
Weekly  Income. 

100.     How  is  the  Weekly  Income  benefit  paid? 

The  beneficiary  receives  a  certain  sum  each  week  for 
a  period  of  26  weeks. 


XI 

assessment  Hilt  3fa£urance 

BY  FORBES  LINDSAY 

We  have  seen  that  the  premiums  charged  in  Legal 
Reserve  Life  Insurance  are  not  only  adequate,  but  also 
necessary,  to  the  full  discharge  of  death  claims.  The 
mathematical  demonstration  of  the  effectiveness  of  the 
net  premium  showed,  at  the  same  time,  that  any  less 
sum  would  be  insufficient  to  fulfill  the  purpose,  except 
for  the  aid  of  favorable  factors  which  cannot  be  counted 
or  with  certainty  nor  precision.  It  is  true  that  every  well 
managed  company  derives  from  its  mortality  and  invest- 
ment operations  gains  which  represent  premium  pay- 
ments in  excess  of  the  cost  of  insurance,  but  it  is  equally 
true  that  these  gains  are  irregular  and  conditional;  that 
they  constitute  the  sole  margin  of  safety  possessed  by 
the  company,  except  where  capital  stock  exists,  and  that 
they  are  the  only  sources  of  surplus  in  Life  Insurance. 
In  short,  since  the  cost  of  insurance  fluctuates  and  cannot 
be  calculated  in  advance,  the  only  practical  method  of 
insuring  solvency  is  by  securing  from  policyholders  such 
sums  as  will  at  least  equal  the  maximum  cost  of  the 
benefits  guaranteed  to  them. 

During  the  early  years  of  Life  Insurance  in  this 
country  there  was  another  factor  of  the  business  which 
tended  to  greatly  increase  the  savings  or  gains  of  the 
companies.  Policies  contained  no.  surrender  values. 
When  the  insured  failed  to  meet  any  due  premium  the 
contract  was  canceled  and  he  forfeited  all  interest  in  the 
payments  that  he  had  made.  Under  such  conditions 
the  profits  of  a  company  from  lapses  were  extraordinarily 
large  and  it  was  enabled  to  credit  persistent  policyholders 
with  dividends  much  in  excess  of  those  paid  at  the 
present  day. 

The  dividend  was  frequently  fifty  per  cent,  and  in 
anticipation  of  it  many  companies  accepted  a  note  in 
payment  of  half  of  the  premium.  It  was  natural  that  the 
layman  should  have  considered  "old  line"  premiums  un- 

Copy righted  1916.  by  Pacific  Mutual  Life  Insurance  Company  of  California 


necessarily^  high,  under  the  circumstances,  and  that  he 
should  have  failed  to  see  the  need  of  a  reserve  in  a  busi- 
ness where  twice  the  amount  required  to  meet  obligations 
seemed  to  be  collected. 

The  introduction  to  America  of  what  Dawson  terms 
"the  disease  of  assessmentism"  was  directly  due  to  the 
anomalous  conditions  that  obtained  in  the  business  of 
Legal  Reserve  Life  Insurance  previous  to  the  passage 
of  non-forfeiture  laws  which  had  the  effect  of  decreasing 
the  cost  of  protection  to  the  insured  and  reducing  the 
sources  of  gains  by  the  company.  Despite  the  fact  that 
the  weakness  of  Assessment  Insurance  in  all  of  its  forms 
had  been  practically  demonstrated  in  Great  Britain,  the 
system  extended  rapidly  throughout  the  United  States 
and  flourished  amazingly  for  the  term  of  a  generation. 
After  enormous  losses  which  conclusively  proved  the 
fallacy  of  the  Assessment  theory  of  Life  Insurance,  the 
system  fell  into  disrepute  and  is  represented  now  mainly 
by  a  greatly  reduced  number  of  fraternal  orders  operat- 
ing on  an  improved  plan. 

The  first  Life  Insurance  company  to  operate  on  a 
level  premium  plan  was  "The  Old  Equitable,"  of  London, 
established  in  1762.  For  half  a  century  previous  to  this 
time  the  "Amicable  Corporation"  had  carried  on  business 
under  what  is  now  called  the  Assessment  System.  The 
original  plan  of  this  concern  restricted  the  age  at  which 
members  might  enter,  but  charged  each  of  them  the  same 
amount  annually.  At  the  end  of  the  year  the  sum  re- 
ceived, less  the  necessary  reduction  for  expenses,  was 
distributed  pro  rata  among  the  beneficiaries  of  the  mem- 
bers who  had  died  in  the  couise  of  the  year.  Under 
this  method  the  annual  levy  was  a  definite  sum,  whilst 
the  amount  of  the  death  benefit  was  indeterminate.  This 
was  soon  changed  to  a  contrary  arrangement,  which  be- 
came general  with  Assessment  associations  in  the  early 
days.  It  operated  thus:  The  amount  of  individual 
death  claims  was  stipulated,  but  no  provision  was  made 
for  the  discharge  of  them  until  after  their  occurrence, 
when  a  sufficient  contribution  to  make  up  the  required 
sum  was  collected  from  each  of  the  members.  These 
post-mortem  levies  were  called  "assessments,"  and  the 
manner  of  making  them  was  commonly  described  as 
"passing  the  hat." 

The  chief  objection  to  this  arrangement  was  found 

106 


in  the  uncertatinty  and  fluctuation  of  cost.  An  unusually 
large  number  of  deaths  at  about  the  same  time  resulted 
in  members  dropping  out  and  repudiating  their  liabilities, 
sometimes  with  the  consequence  of  claims  having  to  be 
"shaved." 

From  this  crude  and  utterly  unscientific  form,  assess- 
mentism  has  developed,  through  many  stages  of  evolu- 
tion, to  a  greatly  improved  condition  in  which  some  pro- 
vision is  invariably  made  for  future  liabilities,  and  the 
chaiges  are  rated  on  a  comparatively  equitable  basis. 

All  Life  Insurance  concerns  outside  of  Legal  Reserve 
companies  fall  into  two  classes,  namely:  Assessment 
associations  and  Fraternal  societies.  Both  classes  oper- 
ate under  the  Assessment  System,  but  with  a  great  va- 
riety of  plans.  All  are  affected  by  the  fatal  defect  of  the 
System,  which  is  failure  to  make  adequate  provision  for 
the  increasing  hazard  and  the  ultimate  certainty  of  death. 
This  weakness  has  brought  about  the  failure  of  many 
hundreds  of  Assessment  associations  and  a  steady  re- 
duction of  the  business  as  represented  by  such  concerns. 
Fraternal  societies,  on  the  other  hand,  owing  to  certain 
peculiarly  favorable  conditions,  have  contrived  in  many 
instances  to  withstand  the  handicap  of  inherent  un- 
soundness. 

ASSESSMENT  ASSOCIATIONS 

Friendly  societies  and  Fraternal  orders  had  been  in 
existence  with  indefferent  success  for  centuries  in  Great 
Britain  before  they  were  introduced  to  this  country.  It 
was  not  until  about  fifty  years  ago  that  assessmentism 
gained  any  considerable  foothold  in  the  United  States, 
and  the  circumstance  which  gave  it  an  impetus  was  al- 
most accidental  in  its  effect.  In  1868  the  Ancient  Order 
of  United  Workmen  was  formed  at  Meadville,  Pennsyl- 
vania. Its  primary  purpose  was  that  of  a  trades  union, 
and  one  of  the  incidental  benefits  was  the  payment  of  a 
dollar  by  every  member  to  the  widow  of  each  of  their 
number  at  his  death.  The  rapid  increase  of  membership 
soon  necessitated  the  limitation  of  the  death  benefit  to 
$2,000.  The  order  flourished  amazingly,  spread  through- 
out the  United  States,  and  at  one  time  had  an  enroll- 
ment of  500,000  persons,  and  insurance  in  force  to  the 
amount  of  $700,000,000. 

107 


The  organization  of  the  A.  O.  U.  W.  was  soon  follow- 
ed by  the  formation  of  other  orders  with  Fraternal 
features,  and  by  numerous  local  associations  that  had  no 
other  purpose  than  that  of  furnishing  "cheap"  insurance. 
The  latter  concerns  were  called  "Business  Assessment 
Associations"  by  way  of  distinguishing  them  from  the 
Fraternals.  Between  1870  and  1880  Assessment  associa- 
tions sprang  up  all  over  the  country,  and  most  of  them 
died  in  their  tracks  without  making  any  considerable 
headway.  Their  conduct  was  characterized  by  universal 
neglect  of  the  actuarial  principles  of  Life  Insurance,  and 
in  many  instances  by  disregard  of  considerations  concern- 
ing age,  health  and  moral  hazard. 

A  number  of  concurrent  conditions  contributed  to  the 
growth  of  this  hybrid  form  of  Life  Insurance.  In  the 
earliest  period  of  the  business  in  America  the  companies 
paid  extraordinarily  high  annual  dividends.  There  was 
little  competition  or  solicitation,  so  that  business  was 
secured  at  a  very  low  cost.  The  death  rate  was  unusually 
low,  as  might  be  expected  in  young  companies,  and  the 
gains  from  lapses  were  large,  where  no  surrender  values 
were  allowed.  These  conditions  led  to  a  wide-spread 
belief,  which  was  naturally  fostered  by  the  advocates  of 
assessmentism,  that  Legal  Reserve  premiums  were  much 
too  high  and  that  reserves  were  entirely  unnecessary. 

The  panic  of  1873  occasioned  the  failure  of  a  number 
of  level  premium  companies  whose  funds  had  been  in- 
vested in  speculative  channels.  During  the  stringency 
of  this  and  the  immediately  following  years,  curtailment 
of  expenditure  was  general,  and  the  appeal  of  Assessment 
associations,  with  their  "cheap"  insurance  on  monthly 
payments,  met  with  a  wide  response.  This  movement, 
which  lasted  for  a  decade  or  more,  was  not  confined  to 
any  class,  but  extended  to  the  most  intelligent  business 
men  of  every  community. 

The  early  Assessment  associations  depended  upon 
postmortem  collections  to  meet  their  claims,  had  no  re- 
serves, and  made  the  same  assessment  at  all  ages.  The 
first  reform  was  to  collect  an  extra  assessment  and  to 
hold  it  as  an  "emergency  fund"  against  the  occurrence 
of  an  excessive  mortality.  The  next  step  in  improvement 
was  the  introduction  of  "graded  assessments."  Entrants 
were  charged  according  to  the  mortality  rate  deduced 
from  one  of  the  standard  tables,  but  this  charge  was 

108 


stationary.  As  it  did  not  rise  with  the  increase  of  age,  it 
is  evident  that  the  member  paid  an  adequate  amount  only 
in  the  first  year  and  that  a  constantly  increasing  defiicit 
was  created  on  his  account  year  by  year.  The  managers 
of  Assessment  concerns  attempted  to  justify  this  short- 
coming by  the  assertion  of  the  fallacy  that  the  influx  of 
young  members,  or  "new  blood,"  as  it  was  called,  would 
keep  down  the  death  rate  and  enable  the  association  to 
maintain  an  equilibrium  of  age.  A  simple  calculation  will 
show  that  in  order  to  obtain  such  a  result  it  would  be 
necessary  to  take  in  new  members  at  such  a  constantly 
increasing  rate  as  to  amount  to  millions  in  the  course  of 
a  few  years. 

As  experience  revealed  the  faulty  foundation  of  assess- 
mentism  and  proved  the  futility  of  the  remedial  measures 
which  have  been  described,  several  associations  adopted 
what  they  termed  the  "stipulated  premium  plan."  The 
premium  was  made  with  some  consideration  for  the  in- 
creased cost  of  insurance  incident  to  advance  in  age.  It 
purported  to  be  permanent,  but  the  certificate  conveyed 
the  right  of  the  association  to  assess  in  the  event  of  ne- 
cessity. Provision  was  made  for  a  moderate  reserve,  or 
"emergency  fund,"  as  it  was  usually  termed.  In  the  cal- 
culation of  this  premium,  "Legal  Reserve"  standards 
were  either  ignored  or  arbitrarily  modified. 

Despite  its  defects,  the  "stipulated  premium"  was  a 
pronounced  step  in  the  right  direction  of  improvement. 
Under  this  plan  a  number  of  associations  reached  sub- 
stantial dimensions,  and,  when  their  managers  were 
forced  to  a  conviction  of  the  inherent  instability  of  assess- 
mentism,  were  enabled  to  re-organize  under  the  Legal 
Reserve  System  with  varying  success. 

For  many  years  past  Assessment  Life  Insurance  has 
steadily  declined.  There  are  now  comparatively  few  as- 
sociations operating  under  this  system,  and  the  aggre- 
gate insurance  carried  by  them  -is  only  about  one-tenth  of 
that  carried  by  the  Fraternal  societies.  The  latter,  al- 
though doing  business  on  the  assessment  principle,  have 
advantages  which  the  associations  do  not  enjoy. 

PATERNAL  SOCIETIES 

The  various  friendly  societies  and  Fraternal  orders 
of  the  present  day  are  a  direct  outgrowth,  with  the 
retention  of  all  the  essential  original  features,  of  the 

109 


beneficial  associations  which,  in  ancient  times,  were  con- 
nected with  the  Roman  trades  unions  and  the  Saxon 
guilds.  These  fraternities  cared  for  sick  members  and 
assisted  the  families  of  deceased  members.  Like  the 
modern  lodges,  they  furnished  social  entertainment  and 
conducted  semi-religious  rituals. 

It  has  been  pointed  out  that  "Business  Assessment" 
insurance  in  the  United  States  sprang  from  the  Fraternal 
System.  Industrial  Life  Insurance  was  also  a  develop- 
ment of  it.  The  Prudential  of  London,  the  pioneer  indus- 
trial company  of  Great  Britain,  had  its  foundation  in  the 
reoiganization  of  a  Fraternal  Society.  The  American 
company  of  the  same  name  had  a  similar  origin. 

It  has  been  already  stated  that  the  first  Fraternal  so- 
ciety to  be  formed  in  the  United  States  was  the  Ancient 
Order  of  United  Workmen,  organized  in  1868.  The  Sys- 
tem is,  therefore,  less  than  half  a  century  old  in  this 
country.  During  that  time  it  has  passed  through  many 
changes.  In  the  earlier  years  orders  were  started  in  great 
numbers  and  flourished,  despite  the  ignorance  and  care- 
lessness that  characterized  the  administration  of  their 
insurance  affairs.  In  the  latter  period  the  lack  of  fore- 
sight began  to  have  its  inevitable  results.  The  low  mor- 
tality natural  to  young  societies  gradually  rose  with  their 
advance  in  age  and  the  consequent  increase  in  the 
average  age  of  their  membership.  A  critical  condition, 
which  is  quite  general  in  its  effects,  has  overtaken  the 
fraternities  in  recent  years.  Many  of  them,  which  had 
made  no  provision  against  the  evil  day,  failed.  Others 
have  been  able  to  maintain  their  existence  by  the  adop- 
tion of  drastic  measures,  but  in  most  cases  no  more  than 
temporary  relief  can  be  expected  from  the  reforms,  which 
must  of  necessity  be  extended  at  some  future  time. 

Although  the  Life  Insurance  operations  of  the  Fra- 
ternal orders  have  been  characterized  by  the  same  fun- 
damental weaknesses  and  errors  which  wrought  de- 
struction to  the  Assessment  associations,  the  former  en- 
joy the  advantages  of  peculiar  vitality  an  innate  strength 
that  are  denied  to  purely  business  concerns.  Whilst 
these  factors  have  not  proved  so  potent  as  the  early 
promoters  of  Fraternalism  anticipated,  they  have  enabled 
the  System  'to  survive,  and  even  expand,  under  extremely 
adverse  conditions. 

A   Fraternal  order  usually  consists  of  a  number  of 

110 


scattered  lodges,  under  the  control,  more  or  less,  of  a 
central  body,  generally  styled  the  Supreme  Lodge.  The 
local  lodges  are  composed  of  members  who  are  acquaint- 
ed with  one  another  and  who  have  common  interests 
other  than  the  material  consideration  of  mutual  insur- 
ance. The  lodge  is  a  social  center.  It  is,  in  fact,  a  club, 
and,  not  infrequently,  one  with  elaborate  accommodations 
for  ease  and  entertainment.  The  members  are  influenced 
by  selfish  motives,  no  less  than  by  fraternal  sentiment  and 
charitable  purpose. 

The  conduct  of  the  Fraternals  has  been  superior  to 
that  of  the  Assessment  associations  in  the  matters  of 
economy  of  management  and  selection  of  risks.  The 
conditions  in  the  former  are  especially  favorable  to  re- 
ducing the  possibilities  of  fraud  to  a  minimum.  This 
is  an  important  advantage  in  the  case  of  the  temporary 
benefits  which  are  the  most  attractive  feature  to  a  large 
proportion  of  the  membership.  When  a  member  is  sick 
or  disabled  by  accident  it  is  customary  for  a  delegation 
from  his  lodge  to  visit  him.  The  ostensible  and  primary 
purpose  is  consolation  and  assistance,  but  an  actual 
result  is  investigation. 

These  factors,  and  the  democratic  system  of  manage- 
ment and  control,  are  conducive  to  a  degree  of  loyalty, 
self-sacrifice  and  cohesion  that  have  supported  the  Fra- 
ternals in  circumstances  which  the  Assessment  associa- 
tions could  not  withstand,  despite  their  apparently 
greater  financial  resources.  Among  the  latter  organiza- 
tions, increase  of  rates  or  re-organization  has  almost 
invariably  been  followed  by  decline  and  failure.  The 
chief  Fraternal  orders,  on  the  other  hand,  have,  during 
the  past  fifteen  years,  and  especially  the  past  ten  years, 
undergone  wide  and  effective  re-adjustment,  with  general 
improvement  of  condition  and  increase  of  stability.  The 
proportion  of  Fraternal  insurance  to  Legal  Reserve  is 
smaller  than  it  was  a  decade  ago.  This  is  not  due  to 
shrinkage  of  the  former,  but  to  comparatively  larger  ex- 
pansion of  the  latter,  which  has  been  by  far  the  greater 
gainer  by  the  numerous  defections  from  the  Assessment 
associations  in  recent  years.  Fraternalism  has  more  than 
held  its  own  throughout  this  period  of  reformation,  and 
the  majority  of  the  more  important  orders  have  shown  a 
tendency  to  revive  and  increase  their  membership  after 
recovery  from  the  disturbing  effect  of  re-adjustment. 

Ill 


Few  Fraternal  orders  in  the  United  States  are  older 
than  thirty-five  years.  With  most  of  them  the  fallacy 
of  their  insurance  methods  has  only  become  apparent  in 
recent  time.  Some  disregarded  the  early  indications  of 
danger  and,  as  a  consequence,  have  either  gone  under  or 
reached  a  state  of  hopeless  embarrassment.  In  general, 
however,  there  has  been  an  evident  appreciation  of  the 
situation  during  the  past  fifteen  years,  and  more  or  less 
intelligent  efforts  to  remedy  it.  The  dissolution  of  two 
of  the  older  and  larger  societies  had  a  powerful  effect  in 
prompting  such  action. 

In  the  early  changes  of  plan  the  Fraternals  displayed 
a  disinclination  to  abandon  their  long-established  system 
of  furnishing  current  cost  protection,  for  the  method  of 
a  level  premium  with  a  reserve  loading,  which  they  had 
always  condemned  as  contrary  to  the  principle  of  Fra- 
ternalism,  and  unnecessarily  onerous.  A  step-rate  plan 
was  the  first  recourse.  This  involved  a  reserve  in  fact, 
though  not  in  name,  but  one  far  from  adequate  for  the 
purpose  in  view.  This  was  followed  in  some  instances  by 
the  introduction  of  a  level  premium  regulated  on  the  as- 
sumption of  a  certain  lapse  experience. 

Latterly  there  has  been  a  general  movement  on  the 
part  of  Fraternals  toward  the  adoption  of  some  form  of 
level  premium  plan,  the  calculations  usually  being  based 
on  the  National  Fraternal  Congress  Table  of  Mortality 
which  was  deduced  from  the  experience  of  a  few  orders. 
Many  of  the  later  adjustments  entail  a  sufficient  mortality 
charge  at  the  attained  age  of  the  members,  but  in  most 
cases  without  provision  for  the  lacking  reserves  which 
would  have  been  accumulated  had  the  insurance  been  in 
force  under  this  system  from  the  age  of  entry.  This  ar- 
rangement, whilst  giving  a  semblance  of  soundness  in  the 
sufficiency  of  premiums  charged  to  new  members,  leaves 
a  serious  deficit  which  must  soon  make  its  effect  manifest 
in  a  manner  that  will  necessitate  a  further  adjustment. 
Nevertheless,  the  condition  of  the  Fraternal  orders  today 
is  very  much  better  than  ever  before  by  reason  of  these 
changes  and  the  realization  on  the  part  of  their  members 
that  reserves  are  absolutely  essential  to  permanency. 

Some  idea  of  the  important  role  played  by  these 
Fraternities  in  the  social  economics  of  our  country  may 
be  inferred  from  the  fact  that  at  least  one-fourth  of  the 
population  is  interested,  directly  or  indirectly,  in  their 

112 


operations.  With  $9,000,000,000  of  insurance  in  force, 
they  have  paid  $1,500,000,000  in  death  claims,  and  not 
less  than  $500,000,000  in  temporary  benefits.  By  far  the 
greater  part  of  these  enormous  sums  have  gone  to  the 
widows  and  children  of  men  who  could  not  have  afforded 
to  pay  the  premiums  for  regular  Life  Insurance  and  who, 
but  for  the  opportunity  afforded  by  Fraternalism,  would 
probably  have  died  uninsured.  The  System  has  done  great 
good  by  disseminating  principles  of  altruism,  co-opera- 
tion and  thrift.  From  the  class  to  whom  it  appeals  are 
graduating  thousands  yearly  who,  by  reason  of  increased 
monetary  ability  and  better  understanding  of  the  subject 
of  Life  Insurance,  are  taking  out  policies  with  Legal 
Reserve  companies. 


113 

S-13O 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

XI 

101.  Name  a  former  important  source  of  profit  to  Life 
Insurance  companies  which  is  now  a  negligible  fac- 
tor? 

Previous  to  establishment  of  surrender  values,  lapses 
were,  perhaps,  the  chief  source  of  profit. 

102.  What   two    radical   effects   are   produced    by   non- 
forfeiture laws? 

The  reduction  of  cost  of  insurance  to  the  policy- 
holder  and  reduction  of  sources  of  profit  to  the  com- 
pany. 

103.  What  was  the  prototype  of  the  American  Assess- 
ment company? 

The  Friendly  Society  of  Great  Britain. 

\  04.     What  conditions  especially  favored  the  introduction 
and  growth  of  Assessmentism  in  America? 

The  extremely  large  dividends  paid  by  Legal  Re- 
serve companies,  creating  a  general  belief  that  these 
premiums  were  excessively  great.  The  extraordinary 
success  of  the  pioneer  concern,  the  United  Workmen. 
The  period  of  business  depression  and  financial  strin- 
gency which  followed  the  panic  of  1873. 

S-147 


105.  What  was  the   "stipulated  premium  plan"   of  As- 
sessment Insurance? 

It  provided  for  a  uniform  premium  which  was  reg- 
ulated by  the  age  of  the  insured.  The  contract  was 
supported  by  a  reserve,  though  not  an  adequate  one. 
The  association  reserved  the  right  to  make  assess- 
ments when  necessary. 

106.  What  is  the  fatal  defect  of  the  Assessment  system 
in  all  its  forms? 

Failure  to  provide  for  an  adequate  reserve. 

1  0  7.  From  what  did  the  Industrial  Insurance  companies 
of  Great  Britain  and  America  spring? 

From  the  beneficial  orders.  The  basic  purpose  of 
Industrial  Insurance  is,  in  fact,  precisely  that  of  the 
old-time  Burial  Clubs. 

1  08.  In  what  especial  respects  has  the  conduct  of  Fra- 
ternal Orders  been  superior  to  that  of  Assessment 
Associations? 

In  the  matters  of  selection  of  risks  and  expense  of 
operation. 

1  09.  Does  Fraternalism  in  the  United  States  exhibit  signs 
of  decay? 

No.  On  the  contrary,  with  the  extinction  of  the 
weakest  orders  and  the  improvements  in  the  system, 
Fraternalism  exhibits  hopeful  signs  of  perpetuity. 

1  1  0.  What  general  benefits  have  accrued  from  the  op- 
erations of  Fraternal  Orders? 

They  have  extended  protection  to  many  thousands 
who  could  not  afford  to  pay  Legal  Reserve  premiums. 
They  have  fostered  altruism,  thrift  and  co-operation. 
They  have  exerted  an  educative  influence  which  has 
resulted  in  many  of  their  members  taking  regular 
insurance. 


XII 


<0rgam?atton  anb  (Operation  of  a 
Hegal  &egerbe  Company 


BY  FORBES  LINDSAY 

Life  Insurance  is  a  highly  technical  business.  The 
administration  of  a  company  is  a  complex  operation.  The 
various  departments  of  a  company  are  charged  with  tasks 
of  a  most  diversified  character.  The  head  of  each  must 
be  a  man  of  special  qualifications  for  his  particular 
duties.  In  the  most  efficiently  officered  company  the 
actuary  and  medical  director  would  be  incapable  of  ex- 
changing positions;  the  treasurer  would  not  be  com- 
petent to  fill  the  place  of  agency  director.  In  order  to 
be  thoroughly  successful,  a  Life  Insurance  organization 
must  have  at  the  head  of  each  of  its  divisions  a  man 
peculiarly  fitted  by  training  and  ability  for  the  work 
assigned  to  him. 

There  is  a  close  similarity  in  the  organization  and 
administration  of  large  insurance  companies.  As  the 
Pacific  Mutual  is  typical  of  a  well-established  company, 
and  is  one  of  the  oldest  and  largest  in  this  country,  we 
shall  gain  an  understanding  of  the  subject  in  hand  by 
taking  the  Pacific  Mutual  as  a  representative  example. 

DIRECTORS 

The  Directors  are  immediately  responsible  to  the 
stockholders  and  policyholders  for  the  conduct  of  the 
company.  The  appointment  and  removal  of  all  officers, 
as  well  as  the  regulation  of  all  salaries  and  remunera- 
tions, are  in  their  hands.  They  declare  all  dividends  and 
direct  the  general  policy  of  the  company.  In  the  earlier 
days  of  the  business  it  was  common  practice  for  directors 
to  perform  their  duties  in  a  perfunctory  manner  and 
leave  the  management  of  affairs  in  the  hands  of  the 
president.  At  the  present  time  the  directors  are  held  to 
strict  responsibility.  They  are  generally  well-informed 
as  to  the  details  of  their  company's  operations  and  it 
is  usual  to  form  them  into  committees,  to  each  of  which 

Copyrighted  1916.  by  Pacific  Mutual  Life  Insurance  Company  of  California 


is  assigned  some  specific  duties  of  an  important  natures 
The  Board  of  Directors  of  the  Pacific  Mutual  em- 
braces  two   standing  committees — the   Executive   Com- 
mittee and  the  Investigating     Committee — as     well     as 
several  special  committees. 

Among  the  extensive  functions  of  the  Executive  Com- 
mittee are  the  care  of  the  Company's  property  and  funds  ; 
the  making  of  all  contracts  with  General  Agents ;  the 
appointment  and  supervision  of  the  Application  Com- 
mittee; the  inspection  and  approval  or  rejection  of  all 
loans. 

The  Investigating  Committee  is  charged  with  the 
duty  of  making  a  complete  examination  of  the  Company's 
business  for  the  preceding  calendar  year,  and  a  thorough 
investigation  of  its  condition.  The  Company's  Official 
Annual  Statement  is  subject  to  the  verification  and  en- 
dorsement of  this  Committee. 

EXECUTIVE  DEPARTMENT 

The  Executive  Department  of  a  company  may  be 
likened  to  the  central  station  of  an  electrical  system. 
From  this  focal  point  the  motive  powTer  is  transmitted 
through  the  various  ramifications  of  the  organization 
Here  the  general  policies  of  the  company  originate,  and 
from  this  center  the  numerous  divisions  and  subdivisions 
are  controlled  and  directed. 

The  President.  The  Chief  Executive,  or  President, 
is  immediately  responsible  to  the  Directors  of  the  Com- 
pany for  all  details  of  management.  He  is  seldom  charged 
with  specific  duties,  but  must  maintain  a  close  oversight 
of  the  entire  organization.  The  Directors  relegate  to 
him,  subject  to  their  approval,  most  of  the  functions 
relating  to  employees  and  field  representatives.  He  is 
the  connecting  link  between  the  Directors  and  the  Offi- 
cers of  the  Company.  His  subordinates  look  to  him  for 
authority,  guidance  and  counsel.  The  Vice-presidents 
work  in  the  closest  contact  with  him  and  when  occasion 
arises,  one  or  another  of  them  acts  in  his  place. 

The  ideal  Life  Insurance  president  combines  in  his 
make-up  the  qualities  of  the  general,  the  judge,  the 
banker  and  the  merchant.  His  outlook  must  be  broad 
and  far-reaching.  Perhaps  his  chief  qualification  is  the 
ability  to  select  fit  men  for  the  important  positions  of 
the  company,  and  the  faculty  of  keeping  his  staff  in 

118 


harmonious  and  efficient  working  order.  The  best  evi- 
dence of  his  success  is  found  in  an  organization  which 
operates  as  smoothly  and  effectively  in  his  absence  as 
when  he  is  at  his  desk. 

Vice-President.  The  Vice-President  of  the  Pacific 
Mutual  is  the  active  head  of  the  Life  Agency  Depart- 
ment. He  is  also  the  Treasurer  of  the  Company. 

Second  Vice-President.  This  officer  is  charged  with 
the  supervision  of  the  Accident  Department  and  assists 
the  Vice-President  in  the  management  of  the  Agency 
Department.  In  the  performance  of  these  duties  he 
spends  several  months  of  each  year  in  the  field. 

Third  Vice-President.  The  negotiation  of  investment 
loans  is  largely  in  the  hands  of  this  officer. 

Fourth  Vice-President.  This  officer  is  charged  with 
the  detail  conduct  of  the  Accident  Department,  and  is 
responsible  for  its  policy  forms,  claim  adjustments,  etc. 

Secretary.  The  Secretary  is  responsible  for  various 
and  extensive  duties.  He  has  three  Assistants,  the  Comp- 
troller and  the  Superintendent  of  the  Renewal  Depart- 
ment acting  in  that  capacity.  The  Secretary  keeps 
records  of  the  proceedings  of  the  stockholders,  Board  of 
Directors,  Executive  Committee,  and  of  all  standing 
comittees.  He  is  the  medium  through  which  policy- 
holders  and  the  public  communicate  with  the  Company. 
He  edits  the  Pacific  Mutual  "NEWS,"  and  prepares  the 
literature  which  is  provided  for  the  use  of  agents.  All 
commercial  advertising  done  by  the  Company  or  its 
agents  is  subject  to  his  supervision, 

AGENCY  DEPARTMENT 

The  different  divisions  of  a  Life  Insurance  company 
are  closely  inter-related,  and  the  success  of  each  is  es- 
sential to  the  success  of  the  whole.  The  actuary  might 
wreck  a  company  by  faulty  calculations;  the  medical 
director  by  injudicious  selection;  and  the  financial 
officer  by  bad  investments.  It  cannot  be  said,  therefore, 
that  any  one  branch  of  a  company's  business  is  more 
important  than  another.  It  is,  however,  customary  to 
speak  of  the  Agency  Department  as  the  most  vital 
portion  of  the  company's  organization,  because  its  ac- 
tivities form  the  basis  for  all  other  operations. 

There  are  two  distinctive  methods  of  cultivating  the 
field  for  business.  Under  one  of  these,  which  is  called  the 

119 


Agency  System,  the  company  makes  arrangements  with 
individuals  to  handle  certain  territories  for  it.  The  con- 
tracts provide  for  stipulated  rates  of  commission  and  for 
certain  other  benefits  and  aids  in  securing  business.  The 
General  Agents,  on  their  part,  make  contracts  with  sub- 
agents  to  secure  business,  offering  them  similar  induce- 
ments. Under  this  system  the  General  Agent  meets  the 
expenses  of  running  his  business  and  enjoys  whatever 
profits  he  may  be  able  to  secure  from  it.  Under  the 
other  method,  which  is  called  the  Branch  Office  System, 
the  company  works  the  field  directly,  making  contracts 
with  sub-agents  and  putting  salaried  cashiers  or  mana- 
gers in  charge  of  the  various  offices.  The  New  York 
Life  affords  an  illustration  of  the  latter  system,  and  the 
Pacific  Mutual  of  the  former. 

The  work  of  the  Agency  Department  is  so  extensive 
and  diversified  that  the  responsibilities  of  it  are  usually 
shared  by  two  or  three  officers.  The  desirability  of  a 
wide  distribution  of  risks  induces  companies  to  operate 
over  the  greatest  extent  of  territory  that  may  be  favor- 
ably covered.  Managers  or  General  Agents  must  be 
secured  for  a  large  number  of  states  or  smaller  agencies ; 
they  must  be  instructed  and  directed ;  their  accounts  and 
the  records  of  their  offices,  as  well  as  those  of  the  busi- 
ness of  sub-agents,  must  be  kept  at  the  Home  Office. 
The  Agency  Department  must  arrange  for  the  admission 
of  the  company  into  outside  states;  it  must  take  meas- 
ures to  comply  with  the  local  insurance  laws;  it  must 
secure  authority  for  its  Managers  to  do  business  and 
obtain  licenses  for  their  agents. 

It  may  be  added  that  a  company  is  amenable  to  the 
insurance  laws  of  every  state  in  which  it  operates,  no 
less  than  to  those  of  the  state  from  which  its  charter  is 
derived. 

The  Agency  Department  is  responsible  for  the  per- 
formance of  agency  contracts  and  the  observance  of  field 
regulations.  It  audits  agency  accounts  and  assembles 
them  for  transfer  to  the  general  books  of  the  company. 

After  a  policy  has  been  issued  and  invoiced  by  the 
Policy  Department  it  passes  to  the  Agency  Department 
for  statistical  record  and  proper  accounting.  A  separate 
card  record  of  all  new  first  year's  business,  whether  de- 
clined, postponed,  issued,  not-taken,  unpaid  or  settled, 
is  maintained  in  this  Department. 

120 


The  statistical  records  of  the  Department  show  the 
volume,  quality,  value  and  growth  of  the  business,  the 
amount  of  preliminary  business  in  force,  the  degree  of 
waste  in  the  first  year,  the  rate  of  lapse  in  the  second 
year,  and  similar  information.  The  Department  also 
keeps  complete  records  of  the  transactions  of  individual 
agencies  and  the  amount  of  business  written  and  paid  for 
by  individual  agents. 

SCHOOL  FOR  SALESMEN 

This  is  a  recently  organized  Department  of  the  Com- 
pany's business.  It  is  an  auxiliary  to  the  Agency  De- 
partment and  designed  to  increase  tire  efficiency  of  the 
field  force  through  a  correspondence  course  of  instruction 
in  the  theory  and  practice  of  Life  Insurance.  This  De- 
partment operates  under  the  direction  of  the  School 
Committee, 

Bureau  of  Information,  This  is  a  section  of  the  School 
which  exercises  a  number  of  secondary  utilities.  It  is  a 
source  of  information  and  advice  on  all  matters  relating 
to  field  work.  It  circulates  among  the  Company's  agen- 
cies printed  matter  conveying  suggestions,  new  ideas, 
specimen  circular  letters,  and  other  material  of  practical 
value.  Individual  inquiries  relating  to  Life  Insurance 
subjects  and  requests  for  advice  on  problems  of  personal 
work  receive  specific  replies.  The  services  of  the  Bureau 
are  not  restricted  to  members  of  the  School,  but  are  avail- 
able to  any  and  all  representatives  of  the  Company. 

Research  Section.  It  maintains  a  Research  Section 
consisting  of  several  hundred  clippings,  pamphlets  and 
digests  of  books  relating  to  all  the  phases  of  Life  In- 
surance. 

ACTUARIAL  DEPARTMENT 

This  is  the  most  technical  division  of  a  company.  The 
actuary  is  a  man  who  has  had  thorough  training  in  the 
mathematics  of  Life  Insurance.  He  must,  moreover, 
have  a  general  knowledge  of  the  business  and  especially 
of  those  phases  of  it  which  are  related  to  field  work. 

This  Department  is  responsible  for  the  preparation 
of  the  rate-book  and  for  practically  all  the  technical  cal- 
culations of  the  Company.  It  prepares  figures  for  sur- 
renders, adjustments  and  re-issues.  It  calculates  all 

121 


dividends  and  issues  the  statements  regarding-  them 
which  are  submitted  to  policyholders. 

The  Actuarial  Department  prepares  the  forms  for  Life- 
insurance  policies,  policy  loan  agreements,  application 
for  surrender,  and  application  for  insurance.  (The  ex- 
amination blank,  which  is  part  of  the  application,  is  pre- 
pared by  the  Medical  Department). 

This  Department  submits  the  excess  lines  which  the 
Company  re-insures,  keeps  accounts  and  records  of  them 
and  transacts  all  business  with  the  re-insuring  company. 

The  records  of  the  Actuarial  Department  are  various. 
and  extensive.  They  embrace  the  insurance  paid-forr 
terminated,  and  in  force,  divided  into  classes  of  policies 
and  showing  manner  of  termination.  From  these  records 
is  deduced  the  reserve  valuation  that  enters  into  the 
Annual  Statement.  The  Department  is  also  responsible 
for  testing  and  assembling  all  the  figures  that  are  con- 
tained in  the  Annual  Statement.  An  extension  of  this 
task  is  the  preparation  and  printing  of  the  voluminous 
annual  report  which  is  required  by  the  insurance  depart- 
ments. It  attends  to  the  payment  of  premium  taxes  and 
various  fees,  and,  in  fact,  transacts  all  the  business  with 
insurance  departments,  except  that  relating  to  agents' 
licenses. 

The  Actuarial  Department  is  constantly  engaged  in 
the  collection  of  data  relating  to  mortality,  lapses  and 
other  experiences.  This  information  is  of  the  utmost 
value  to  the  Company  in  the  conduct  of  its  business  and 
to  the  Secretary  in  the  preparation  of  printed  material 
for  the  use  of  the  field  force  . 

It  may  be  added  that,  whilst  the  Actuarial  Depart- 
ment supplies  the  figures  for  policy  loans,  cash  surren- 
ders, paid-up  insurance,  etc.,  it  does  not  handle  the 
routine  correspondence  relating  to  these  matters. 

MEDICAL  DEPARTMENT 

This  Department  consists  of  a  Director,  one  or  more 
assistants,  and  a  numerous  corps  of  examiners.  The 
selection  and  training  of  the  latter  is  a  highly  important 
duty  of  the  Department.  All  applications  and  examina- 
tions are  submitted  to  the  judgment  of  the  Medical  De- 
partment, but  final  disposition  of  them,  except  in  cases 
of  small  amounts,  rests  with  the  Application  Committee. 

The  actuary  bases  his  calculations  on  a  standard  table 

122 


©1"  mortality.  It  is  the  purpose  and  constant  effort  of 
the  Medical  Director  to  reduce  the  company's  actual 
experience  as  much  below  the  tabular  figure  as  possible, 
consistently  with  the  acceptance  of  desirable  applications. 
The  direct  medium  for  the  accomplishment  of  this  ob- 
ject is  the  careful  selection  of  risks.  The  aim  cannot, 
however,  be  achieved  merely  by  examination  and  in- 
vestigation of  applicants,  but  necessitates  exhaustive 
study  by  the  Medical  Director  of  the  experiences  of 
companies — his  own  and  others — with  various  classes  of 
risks. 

It  may  b-e  stated  that  consideration  of  the  medical 
aspect  of  a  risk  is  not  the  sole  influence  in  its  disposition. 
The  moral  hazard  is  weighed  in  connection  with  a  report 
received  from  an  inspection  bureau.  The  Accident  De- 
partment may  be  called  upon  for  an  opinion  as  to  the 
hazard  involved  in  the  applicant's  occupation.  The 
Company's  records  may  reveal  an  unfavorable  history 
of  its  previous  insurance  transaction  with  the  applicant. 
Enquiry  may  discover  a  rejection  by  another  company, 
which  has  not  been  acknowledged  in  the  application.  In 
fact,  all  the  information  bearing  upon  the  case  is  sought 
from  a  number  of  available  sources,  carefully  sifted  and 
measured  by  the  accepted  standards  for  risks.  The 
result  is  acceptance  on  the  form  and  in  the  amount  ap- 
plied for;  offer  of  a  different  form  or  smaller  amount; 
further  examination  and  observation ;  postponement ; 
or  declination. 

POLICY  DEPARTMENT 

This  Department  is  charged  with  the  care  of  applica- 
tions from  the  time  that  they  are  delivered  at  the  Home 
Office  until  their  final  disposition  by  declination,  suspen- 
sion, or  conversion  into  policies. 

After  an  application  has  been  reviewed  a  photograph 
of  it  and  the  medical  examination  is  made  for  attach- 
ment to  the  policy.  Before  passing  the  application  to 
the  Medical  Department,  the  Index  Section  is  called  upon 
for  a  statement  of  the  insurance,  if  any,  already  carried 
by  the  applicant  in  the  Company.  Following  approval, 
the  application  goes  to  the  Writing  Section,  where  the 
policy  form  is/  filled  out  and  a  card  record  of  it  is  made. 
These  processes  ordinarily  occupy  but  a  few  hours  and 
the  policy  is  forwarded  to  its  destination  on  the  day  in 

123 


which  it  is  written,  provided  a  satisfactory  inspection 
report  is  at  hand.  In  cases  of  distant  origin,  the  results^ 
of  inspection  are  telegraphed  to  the  Home  Office  so  that 
it  is  not  necessary  to  await  receipt  of  the  documentary 
report. 

Re-issue  Section.  This  is  a  division  of  the  Policy 
Department,  in  which  changes  of  beneficiary,  asignments 
and  re-issues  are  handled.  In  this  Section  papers  and 
records  are  reviewed,  the  proper  forms  forwarded  for 
signature  and  the  necessary  endorsements  made  upon 
policies. 

Filing  Section.  All  applications,  together  with  any 
correspondence  or  papers  relating  to  them,  are  filed  in 
the  central  Filing  Section  of  the  Company's  main  vault. 
Thus  all  information  regarding  any  application  may  be 
readily  found  under  one  file  in  a  specific  place. 

RENEWAL  DEPARTMENT 

This  Department  keeps  a  complete  history  of  every 
active  policy  carried  by  the  Company  and  a  complete 
insurance  account  with  every  holder  of  a  policy.  The 
card  records  of  the  Department  exhibit  name  of  insured, 
age,  address,  plan  of  insurance,  amount,  date  of  issue, 
premium,  beneficiary,  dividends  paid  or  credited,  notes 
to  cover  premium,  and  every  change  made.  These  cards 
are  filed  by  agencies  and  all  the  items  pertaining  to 
policies  contained  in  the  General  Agents'  daily  reports 
are  posted  theron.  This  requires  a  careful  scrutiny  of 
the  records,  as  no  payment  can  be  accepted  if  the  grace 
period  has  expired,  unless  proper  evidence  of  insurability 
has  been  received.  From  the  records  of  the  Department 
the  exact  status  of  any  policy  can  be  ascertained  in  a 
few  moments. 

Stencil  Section.  Receipts  for  all  premiums  are 
printed  on  a  stenciling  machine,  as  the  due  dates  ap- 
proach, and  mailed  to  the  collecting  agencies. 

LIFE  MATURITY  DEPARTMENT 

The  Life  Maturity  Department  makes  settlement 
of  death  losses  occurring  under  the  Company's  life  poli- 
cies, of  claims  arising  from  Permanent  Total  Disability, 
and  of  matured  endowments,  cash  surrenders  and  de- 
ferred dividends. 

When  notice  is  received  of  a  policyholder's  death, 

124 


this  Department  reviews  all  papers  pertaining  to  the 
policy  involved,  and,  if  it  is  found  to  be  in  force,  the 
necessary  documents — termed  "Proofs  of  Death" — are 
forwarded  to  the  General  Agent  with  instructions  for 
their  execution,  and  advice  as  to  whom  the  proceeds  of 
the  policy  are  to  be  paid. 

Executors,  administrators  and  guardians  must  furnish 
the  Company  with  certified  copies  of  their  Letters  of 
Appointment.  These  Court  proceedings  consume  time 
and  entail  expense.  It  is  therefore  advisable,  when  the 
object  of  the  insured  is  to  make  the  policy  payable  to  a 
specific  person,  that  the  application  should  definitely  in- 
dicate such  person  as  beneficiary. 

Upon  receipt  of  the  completed  Proofs  of  Death  at 
the  Home  Office  the  claim  is  formally  approved  and  a 
check  issued  for  delivery  upon  surrender  by  the  claimant 
of  the  policy  and  execution  by  him  of  the  Mortuary  Re- 
ceipt, acknowledging  discharge  of  the  Company's  ob- 
ligation. A  statement  of  settlement,  itemizing  any  ad- 
ditions, such  as  reversions  purchased  by  dividends,  or 
deductions,  such  as  policy  loans,  appears  on  the  Mortuary 
Receipt. 

In  case  of  a  Life  Income  policy,  the  first  instalment 
is  paid  when  the  claim  is  approved.  When  subsequent 
instalments  become  due  the  Company  satisfies  itself, 
through  the  medium  of  this  Department,  that  the  bene- 
ficiary is  still  alive. 

Claims  growing  out  of  the  Permanent  Total  Disa- 
bility clause  of  the  Company's  life  policies  are  filed  with 
this  Department,  which  requires  satisfactory  proofs  of 
the  immediate  condition  of  the  insured  and  evidence  of 
continued  disability  before  each  subsequent  annual  in- 
stalment is  paid. 

The  proceeds  of  annuities  are  paid  through  this  De- 
partment, the  only  evidence  of  claim  being  proof  that 
the  annuitant  is  alive. 

POLICY  LOAN  DEPARTMENT 

Whilst  the  Pacific  Mutual,  like  all  other  insurance 
companies,  discourages  borrowing  on  policies,  applicants 
for  such  loans  are  accommodated  with  due  diligence,  the 
only  condition  being  the  deposit  of  policies  as  security, 
and  compliance  with  all  legal  requirements. 

When  a  request  for  a  loan  has  been  received  at  the 

125 


Home  Office,  the  Renewal  Department  submits  com- 
plete memoranda  of  the  status  of  the  policy,  to  which  the 
Actuarial  Department  appends  a  notation  of  the  present 
loan  value.  With  this  data  before  it,  the  Policy  Loan 
Department  reviews  all  the  conditions  affecting  the  ap- 
plication and  the  execution  of  the  papers.  If  these  are 
satisfactory,  the  loan  agreement  is  issued  for  the  signa- 
ture of  the  parties  to  it.  Under  existing  insurance  laws 
the  majority  of  policies  contain  the  right  to  change  the 
beneficiary,  which  makes  the  signature  of  the  insured 
sufficient  to  effect  a  loan. 

Upon  return  of  the  agreement  properly  completed  and 
accompanied  by  the  policy,  the  check  is  issued.  The  first 
payment  of  interest,  which  is  always  charged  in  advance 
to  the  policy  anniversary,,  is  withheld,  together  with  the 
premium  due  to  complete  the  current  policy  year.  With 
the  check  the  Company  issues  receipts  for  the  policy  and 
for  premiums.  In  addition,  the  insured  is  furnished  with 
a  complete  memorandum  of  the  loan  for  immediate  in- 
formation and  for  future  reference.  Interest  is  collected 
directly  from  the  Home  Office,  borrowers  being  notified 
as  due  dates  approach. 

A  policy  loan  may  be  allowed  to  stand  as  a  lien 
against  the  reserve  and,  if  not  discharged  before  the 
policy  becomes  a  claim  or  is  surrendered,  will  be  deducted 
in  the  ultimate  settlement.  The  Company  will  accept 
payment  of  policy  loans,  in  whole  or  in  part,  at  any  time 
without  notice. 

The  insurance  laws  and  the  conditions  of  competition 
have  led  to  the  extreme  of  ease  and  liberality  in  the 
matter  of  policy  loans.  As  a  consequence  there  has  been 
a  steadily  increasing  tendency  to  borrow  upon  insurance 
security.  In  by  far  the  majority  of  instances  the  re- 
payment of  these  loans  is  left  to  the  beneficiaries,  thereby 
reducing  the  nominal  protection  which  has  been  provided 
for  them.  This  is  obviously  contrary  to  the  purpose  and 
spirit  of  Life  Insurance. 

INVESTMENT  DEPARTMENT 

The  expenses  of  a  company's  management  are  met 
from  the  fund  created  for  that  purpose.  Its  dividend  dis- 
bursements are  made  from  its  surplus.  The  reserve  is 
drawn  upon  to  discharge  its  insurance  obligations.  The 
chief  of  these  are  payment  of  death  claims  and  matured 

126 


endowments.  The  latter  can,  of  course,  be  anticipated 
with  precision.  The  former  occur  with  sufficient  regu- 
larity and  close  accordance  to  "tabular"  calculation  to 
allow  provision  for  payment  to  be  made  considerably  in 
advance  of  necessity.  Demand  obligations — those  grow- 
ing out  of  the  promissory  clauses  of  contracts  relating  to 
loans  and  cash  surrenders — are  uncertain  as  to  occur- 
ence  and  extent.  They  depend  upon  conditions  that  can 
neither  be  controlled  nor  foreseen  by  the  Company.  Com- 
mercial depression  and  monetary  stringency  are  invari- 
ably accompanied  by  heavy  demands  upon  the  com- 
panies for  loans  and  surrenders.  Social  changes  will 
sometimes  effect  the  same  results.  In  recent  years  the 
increased  tendency  to  travel  and  the  growth  in  popularity 
of  the  automobile,  afford  illustrations. 

It  will  be  seen,  then,  that  an  insurance  company's 
financial  obligations  are  to  two  distinct  classes  with  con- 
trasting characteristics.  In  one  class  these  obligations 
are  deferred  and  approximately  calculable;  in  the  other 
they  are  subject  to  demand  and  uncertain  as  to  amount. 
Evidently,  constant  preparation  must  be  maintained  to 
meet  the  latter.  This  necessitates  the  holding  of  a  suf- 
ficient quantity  of  readily  convertible  securities.  They 
must  be  of  stable  value  and  such  intrinsic  soundness  as 
to  insure  their  buoyancy  in  a  depressed  market.  Such 
securities  are  government,  state  and  municipal  bonds, 
standard  railroad  and  other  high  class  public  service 
bonds.  They  naturally  yield  low  rates'  of  interest  and  a 
company  will  not  own  more  of  them  than  conservative 
management  demands.  The  statutory  restrictions  in  the 
matter  are  not  severe,  but  every  insurance  commissioner 
is  vested  with  discretion  as  to  the  acceptance  of  invest- 
ments at  the  company's  book  value.  This  undefined  power 
of  rejection  probably  operates  more  effectively  toward 
conservatism  on  the  part  of  companies  than  more  restric- 
tive statutes  would  do. 

The  ownership  of  real  estate  is  not  usually  consid- 
ered in  the  light  of  investment  by  insurance  companies, 
except  as  incidental  to  other  uses  of  the  property.  The 
advertising  value  of  office  buildings  is,  however,  a  gen- 
erally recognized  factor  in  profit,  though  not  a  tangible 
asset.  First  mortgages  of  real  estate  security  are  the  pre- 
ferred form  of  investment  with  which  provision  is  made 
for  the  other  class  of  obligations.  This  line  of  invest- 

127 


ment  may  be  made  to  produce  the  largest  interest  return 
consistent  with  safety.  Nowhere  else  in  the  United 
States  can  these  factors  be  found  in  the  same  degree  as  in 
mortgages  upon  irrigated  farm  lands  of  the  Pacific  Slope. 

It  is  of  vital  importance  to  a  company  that  it  should 
obtain  a  profitable  rate  of  interest.  This,  and  savings  in 
mortality,  are  the  principal  sources  of  gain.  A  small  dif- 
ference in  interest  rate  may  effect  a  large  increase  in 
arnings.  To  illustrate :  In  1906  the  rate  of  interest  earned 
by  the  Pacific  Mutual  on  mean  invested  funds  was  4.40; 
in  1915  it  was  6.25.  The  difference  between  these  figures 
represented  in  the  latter  year  a  gain  of  $605,143  in  its 
income. 

The  successful  conduct  of  the  Investment  Depart- 
ment requires  technical  knowledge,  good  judgment,  and 
close  attention  to  a  great  deal  of  detail.  The  Pacific 
Mutual  employs  qualified  men  to  appraise  values,  to  in- 
spect property  in  which  the  Company  is  interested,  and 
to  report  changes  due  to  neglect  of  improvements,  failure 
to  make  repairs,  and  various  other  developments.  A 
numerous  and  competent  office  force  is  employed  in  col- 
lecting interest,  seeing  that  mortgaged  property  is  ade- 
quately covered  by  fire  insurance  and  that  it  is  duly 
renewed,  ascertaining  that  taxes  and  assessments  for  im- 
provements are  paid  before  the  final  dates  fixed  by  stat- 
ute, and  in  a  variety  of  clerical  duties  incident  to  the 
business. 

Other  considerations  being  equal,  the  Company 
naturally  treats  its  policyholders  as  preferred  applicants 
for  loans,  just  as  a  banker  favors  his  depositors  in  the 
same  matter.  The  Company  frequently  secures  insur- 
ance in  connection  with  its  investment  loans,  and  some- 
times requires  it  as  additional  security.  This,  however, 
only  creates  an  incidental  connection  between  the  deal- 
ings of  the  Investment  Department  and  the  work  of  the 
field  force.  These  two  branches  of  the  Company's  oper- 
ations are  entirely  independent  of  one  another.  It  is  not 
within  the  province  of  the  field  man  to  seek  loans,  nor  to 
enter  into  any  kind  of  negotiation  relating  to  them. 

ACCIDENT  DEPARTMENT 

This  Department  embraces  the  Commercial  Division, 
Railroad  Division,  Monthly  Premium  Division  and  Life 
Disability  Division.  Each  of  these  divisions  has  an  expert 

128 


underwriter  especially  informed  on  the  particular  hazards 
assumed  by  it.  The  Company  maintains  an  extensive 
statistical  bureau  through  which  it  learns  the  risk  in 
eveiy  occupation,  as  well  as  the  cost  of  every  protective 
feature  in  its  policies.  These  accident  tables  serve  a 
similar  purpose  to  that  of  the  mortality  tables  in  the  Life 
Department,  and  are  so  reliable  that  they  work  out  with 
almost  exactness. 

Every  agency  of  the  Accident  Department  is  prac- 
tically an  insurance  company  complete,  accepting  risks, 
subject  to  the  approval  of  the  Home  Office,  issuing 
policies,  and,  in  many  cases,  paying  claims.  Adjustments 
are  closely  supervised  by  the  Company  and  every  effort  is 
made  to  qualify  General  Agents  for  handling  this  feature 
of  the  business. 

All  claims  reported  to  the  Home  Office  are  disposed 
of  with  the  utmost  dispatch.  On  receipt  of  notice,  the 
record  of  the  risk  is  reviewed  and  the  necessary  blanks  are 
forwarded  to  the  claimant.  Immediately  upon  the  return 
of  these  in  the  proper  order  the  claim  is  paid. 

All  accident  accounts  are  kept  in  the  Department,  as 
well  as  extensive  statistics  of  the  experience  of  each 
agency. 

Commercial  Division  insures  professional  and  busi- 
ness men  mainly — that  is  to  say,  the  classes  which  are 
generally  described  as  "preferred"  or  "A"  risks.  The 
policies  of  this  section,  like  those  of  the  others,  are  espe- 
cially adapted  to  the  risks  assumed  and  the  demands  of 
the  classes  insured. 

Railroad  Division.  This  division  confines  itself  to 
railroad  men.  Its  premiums  are  mostly  collected  through 
the  medium  of  orders  on  paymasters. 

Monthly  Premium  Division  does  virtually  an  indus- 
trial business  in  Accident  and  Health  insurance  and  deals 
with  the  classes  that  buy  Industrial  Life  Insurance.  It 
offers  a  small  addition  of  Life  Insurance  to  its  policy  in 
much  the  same  way  as  the  Life  Department  sells  Acci- 
dent and  Health  in  combination  with  Life  contracts. 

Life  Disability  Division.  This  division  does  not  issue 
insurance,  but  handles  all  claims  involving  temporary  dis- 
ability. 

LEGAL  DEPARTMENT 

The  chief  duty  of  this  Department  is  to  give  such 
assistance  to  the  Company  as  will  prevent  differences  in 

129 


which  the  Company  is  involved  from  being  carried  into 
a  court  of  law  or  equity.  It  is  a  popular  fallacy  that  the 
law  force  of  an  insurance  company  is  mainly  engaged  in 
matters  of  contested  claims.  These,  in  fact,  engage  its 
time  and  activities  to  a  very  small  extent.  For  instance, 
the  Pacific  Mutual  constantly  pays  practically  100  per 
cent  of  its  Life  claims  and  over  98  per  cent  of  its  Accident 
claims  without  litigation.  For  many  years  past  the  gen- 
eral tendency  among  companies  has  been  toward  sim- 
plicity and  precision  in  the  Life  Insurance  contract  until 
it  has  become  virtually  a  promise  to  pay  a  certain  sum 
on  the  concurrence  of  a  certain  event,  except  in  case  of 
fraud.  This  and  the  pronounced  disposition  of  courts  and 
juries  to  favor  plaintiffs  in  litigated  claims  has  brought 
about  a  practice  among  legal  reserve  companies  of  pay- 
ing doubtful  cases,  and  of  seeking  legal  relief  only  in 
instances  of  flagrant  and  provable  frauds.  To  give  a  com- 
prehensive view  of  the  work  of  this  Department  is  im- 
possible. A  vast  field  of  law  is  covered  in  its  work,  and 
it  is  the  duty  of  the  Department  to  supervise  all  litigation 
wherever  the  same  may  be  instituted. 

A  division  devoted  to  the  payment  and  adjustment  of 
claims  is  usually  embraced  in  this  department.  In  a 
company  that  does  business  in  Accident  and  Health  insur- 
ance there  is  generally  a  separate  Claim  Department 
which,  of  course,  co-operates  closely  with  the  Legal  De- 
partment. The  latter  conducts  cases  in  court,  investigates 
questionable  claims,  passes  on  the  phraseology  of  policies, 
draws  up  various  contracts,  advises  in  questions  of  prop- 
erty title,  and  a  thousand  other  matters  of  legal  import. 

The  members  of  this  Department  must  familiarize 
themselves  with  the  insurance  laws  of  the  various  States 
in  which  the  Company  operates  and,  in  addition  to  this, 
must  digest  the  decisions  of  the  courts  of  record  through- 
out the  Union  pertaining  to  Life  Insurance. 

ACCOUNTING  DEPARTMENT 

The  Accounting  Department  has  charge  of  the  Gen- 
eral Books  of  the  Company,  and  is  responsible  for  all 
figures  other  than  non-ledger  items  in  the  Annual  State- 
ment. 

It  is  required  to  see  that  there  is  proper  authority  for 
the  issuing  of  every  check  drawn  by  the  Company,  all 
disbursements  other  than  those  relating  to  policy  con- 

130 


tracts  being  submitted  to  and  approved  by  the  Executive 
Committee,  after  being  O.  K.'d  by  the  Department  re- 
sponsible for  the  expenditure,  and  properly  audited. 

All  expenditures  made  through  any  agency  are 
checked  and  vouched  for  by  the  Agency  Department  be- 
fore being  entered  upon  the  books. 

A  thoroughly  efficient  audit  is  made  each  month  of 
all  policy  loans  made  and  interest  received. 

All  policy  claims  paid,  either  Mortuary  or  Surrender, 
are  also  checked  in  this  Department. 

Every  other  Department  of  the  Company  is  required 
to  check  up  with  and  keep  its  records  in  balance  with  the 
respective  accounts  in  the  General  Ledger. 

Daily,  weekly  and  monthly  summaries  are  prepared, 
giving  every  item  of  information  required  by  the  Officers 
and  by  the  Executive  Committee  in  order  to  keep  them 
in  closest  possible  touch  with  actual  conditions. 

A  separate  set  of  books  is  kept  for  Non-participating 
business,  and  the  utmost  possible  care  is  taken  to  accur- 
ately distribute  all  entries  between  the  Participating  and 
Non-participating  departments, 

SUPPLY  DEPARTMENT 

The  Supply  Department  is  also  the  Purchasing  De- 
partment. 

All  supplies  used  at  the  Home  Office  and  furnished  to 
the  General  Agents  are  handled  by  this  Department, 
which  necessitates  the  handling  of  all  bills  for  the  same 
against  the  Company.  The  shipment  of  supplies,  accom- 
plished by  a  system  of  requisitions,  must  be  handled  with 
dispatch.  Each  separate  requisition  is  prepared  for  ship- 
ment in  exactly  the  same  way  that  merchandise  is 
handled  by  the  wholesaler. 

The  Stock  Room  is  extensive,  and,  as  the  supplies 
carried  on  hand  must  be  arranged  in  such  a  manner  that 
each  blank,  known  by  form  number,  may  be  readily 
located,  an  index  system  is  used. 

To  guard  against  the  supply  of  any  article  becoming 
exhausted,  which  would  necessitate  shipping  orders  short, 
a  system  for  keeping  a  record  of  the  stock  on  hand  is  in 
operation. 

Each  shipment  leaving  the  Home  Office  is  numbered 
and  is  receipted  for  by  the  General  Agent  when  the  pack- 

131 


age  reaches  him.    If  the  package  is  lost,  the  receipt  num- 
ber enables  the  Department  to  trace  the  shipment. 

Working  material  of  every  kind,  office  equipment, 
stationery  and  supplies  of  all  kinds  for  Home  Office  use 
are  also  furnished  by  this  Department. 

MAIL  OFFICE 

The  Mailing  Department  distributes  incoming  mail 
and  collects  outgoing  mail,  assembling  letters  from  va- 
rious departments  and  enclosing  in  one  envelope  those 
addressed  to  the  same  General  Agency. 

Modern  stamping,  sealing,  and  letter-opening 
machines  are  used. 

The  great  value  of  this  Department  to  the  Company 
rests  in  the  speed  and  accuracy  of  its  delivery  of  incom- 
ing mail.  Letters  should  be  addressed  to  the  proper 
department,  and  should  be  enclosed  in  such  manner  as  to 
permit  of  rapid  inspection. 


132 

S131 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

XII 

111.     By  whom  are  applications  for  Life  Insurance  passed 
upon  in  the  Pacific  Mutual? 

By  the  Application  Committee. 

]  1 2.     State   the    items   of    information   contained    in    the 
policy  cards  of  the  Renewal  Department. 

Name  of  insured,  age,  address,  plan  of  insurance, 
number  and  amount  of  policy,  date  of  issue,  prem- 
ium, beneficiary,  dividends  paid  or  credited,  changes 
in  contract,  if  any. 

1  1  3.     With  which  Department  are  Permanent  Total  Dis- 
ability claims  filed? 

Life  Maturity  Department. 

1  1 4.      What    charges    are    made    in    connection    with    a 
policy  loan? 

Interest  in  advance  to  the  date  of  the  policy  anni- 
versary, together  with  the  premium  necessary  to 
complete  the  current  policy  year. 

115.     Why  does  every  company  need  to  carry  a  certain 
quantity  of  "quick"  assets? 

Chiefly  to  meet  unexpected  demands  for  policy  loans. 


1  1  6.     What  branch  of  our  Company  disposes  of  disability 
claims  under  Combination  Insurance  policies? 

Life  Disability  Division  of  the  Accident  Department. 

]  ]  7.     Describe  the  distribution  of  responsibility  in  a  Life 
Insurance  company. 

The  chief  responsibility  rests  on  the  Directors  who 
are  answerable  to  the  stockholders  or  policy  holder  s ; 
next  the  Officers  who  are  answerable  to  the  Direc- 
tors; Heads  of  Departments  who  are  answerable  to 
the  Officers;  office  employes  who  are  answerable  to 
the  Heads  of  their  respective  departments.  In  the 
field,  General  Agents  are  responsible  to  the  Company 
through  the  Agency  Director  and  Sub-Agents  to  the 
General  Agents  with  whom  their  contracts  are  made. 

1  1  8.     Which  do  you  consider  the  most  important  Depart  - 
men  of  a  Home  Office  force? 

The  Executive. 

]  ]  9.     Mention  the  duties  of  the  Secretary  of  the  Pacific 
Mutual  which  relate  to  the  field  force. 

He  edits  the  "News,"  prepares  canvassing  literature 
and  supervises  all  commercial  advertising. 

1  20.     What  are  the  principal  functions  of  the  School  for 
Salesmen? 

To  instruct  the  Company's  agents  and  to  furnish 
information  and  advice  on  all  matters  relating  to 
field  work. 


XIII 

Htfe  3fagurame 

BY  FORBES  LINDSAY 

It  can  hardly  be  necessary  to  state  that  the  safe  and 
profitable  investment  of  Life  Insurance  funds  is  a  fac- 
tor of  the  most  vital  importance  in  the  economy  of  the 
business.  These  investments,  which  constitute  over  80 
per  cent  of  all  the  assets,  include  the  reserves  on  which 
companies  depend  for  the  discharge  of  contractual  obli- 
gations. The  problem  is  a  weighty  one,  not  only  on 
account  of  the  enormous  sum  represented  by  present 
Life  Insurance  assets,  but  also  because  these  must  con- 
stantly increase.  An  essential  feature  of  the  level  pre- 
mium system  of  insurance  is  the  maintenance  of  reserves 
adequate  to  the  discharge  of  all  future  liabilities.  Con- 
sequently, as  the  insurance  in  force  grows,  the  accumu- 
lated funds  of  the  companies  must  expand  correspond- 
ingly. In  1860  the  assets  of  Life  Insurance  companies 
doing  business  in  New  York  aggregated  $24,000,000. 
They  are  now  rapidly  approaching  $5,000,000,000.  What 
will  be  their  amount  at  the  end  of  the  next  half  century? 

The  first  consideration  in  the  investment  of  Life  In- 
surance funds  is  safety.  The  solvency  of  the  company 
demands,  however,  that  their  employment  shall  yield  an 
average  net  rate  of  interest  at  least  equal  to  that  on 
which  the  reserve  computations  are  based. 

It  is,  of  course,  desirable  to  exceed  this  figure  as 
greatly  as  possible,  provided  the  effort  does  not  involve 
any  danger  to  the  principal.  Losses  and  depreciation 
cannot  be  entirely  avoided  by  the  most  careful  manage- 
ment and  the  distribution  of  investments  is  usually  con- 
trived with  a  view  to  securing  the  effect  of  averages  in 
these  contingencies. 

Investing  funds  is  a  business  calling  for  expert  service 
and  all  the  large  companies  have  a  special  department 
devoted  exclusively  to  it.  The  salaries  and  ordinary  ex- 
penses involved  in  the  maintenance  of  this  department 
are  considered  items  in  the  cost  of  general  operation, 

Copyrirbted  1916.  by  the  Pacific  Mutual  Life  Insurance  Company  of  California 


but  the  actual  expense  of  making  investments,  as  well 
as  losses  incurred  in  them,  are  charged  to  the  investment 
account  and  deducted  from  the  gross  profits  gained  by 
the  department. 

With  the  foregoing  exception,  the  expenses  of  a  com- 
pany's management  are  met  from  the  fund  created  for 
that  purpose  by  the  premium  loading.  Its  dividend  dis- 
bursements are  made  from  its  surplus.  The  reserve  is 
drawn  upon  to  discharge  its  insurance  obligations.  By 
far  the  greater  part  of  these  arise  from  death  and  the 
maturity  of  endowments.  The  latter  can,  of  course,  be 
anticipated  with  precision.  The  former  occur  with  suf- 
ficient regularity  and  close  accordance  to  "tabular"  cal- 
culation to  allow  of  provision  for  payment  to  be  made 
considerably  in  advance  of  necessity.  Demand  obliga- 
tions— those  growing  out  of  the  promissory  clauses  of 
policies  relating  to  loans  and  cash  surrenders — are  un- 
certain as  to  occurrence  and  extent.  They  depend  upon 
conditions  that  can  neither  be  controlled  nor  foreseen 
by  the  company.  Commercial  depression  and  monetary 
stringency  are  invariably  accompanied  by  heavy  demands 
upon  the  companies  for  loans  and  surrender  values. 
Social  changes  will  sometimes  effect  the  same  results. 
Illustrations  are  afforded  by  the  increased  tendency  to 
travel  and  the  growth  in  the  popularity  of  the  automo- 
bile, during  recent  years. 

It  will  be  seen,  then,  that  an  insurance  company's 
financial  obligations  are  of  two  distinct  classes  with  con- 
trasting characteristics.  In  one  class  these  obligations 
are  deferred  and  approximately  calculable;  in  the  other 
they  are  subject  to  demand  and  uncertain  as  to  amount. 
Evidently  constant  preparation  must  be  maintained  to 
meet  the  latter.  This  necessitates  the  holding  of  a  suf- 
ficient quantity  of  readily  convertible  securities.  They 
must  be  of  stable  value  and  such  intrinsic  soundness  as 
to  insure  their  buoyancy  in  a  depressed  market.  Such 
securities  are  high-grade  bonds  of  various  descriptions. 

Notwithstanding  the  great  increase  in  policy  loans 
during  the  past  thirty  years  the  need  of  immediate  pro- 
vision for  this  kind  of  demand  has  been  greatly  reduced 
in  the  past  few  years  by  the  inclusion  of  a  clause  in  the 
contracts  of  the  leading  companies,  retaining  to  them 

134 


the  right  of  deferring  policy  loans  for  sixty  or  ninety 
days  after  application. 

The  term  "investments"  in  connection  with  the  Life 
Insurance  business  signifies  funds  which  are  not  imme- 
diately needed — mainly  reserves,  but  also  general  sur- 
plus. Their  care  and  disposition  constitute  a  distinct 
trust  and  entail  grave  responsibilities.  It  is  entirely 
proper  that  the  executives  charged  with  these  respon- 
sibilities, and  who  are  usually  peculiarly  qualified  to  dis- 
charge them,  should  not  be  hampered  in  the  free  exer- 
cise of  their  judgment  and  experience  in  making  invest- 
ments. There  are  various  statutory  restrictions  affecting 
the  matter  in  different  States.  With  few  exceptions,  they 
are  neither  severe  nor  unreasonable,  but  every  insurance 
commissioner  is  invested  with  discretionary  power  as  to 
the  acceptance  of  investments  at  the  company's  book 
value,  and  he  may  require  the  conversion  of  investments 
which  do  not  meet  with  his  approval.  This  undefined 
right  of  rejection  and  reappraisal  probably  operates  more 
effectively  toward  conservatism  than  more  restrictive 
statutes  would  do. 

Compulsory  local  investments  of  Life  Insurance 
funds,  which  is  a  legal  requirement  of  one  State  and  has 
been  considered  by  legislators  of  others,  is  the  most  per- 
nicious of  latter-day  innovations  affecting  the  business. 
If  widely  enacted,  such  a  law  would  make  the  investment 
of  Life  Insurance  funds  much  more  expensive  and  dif- 
ficult than  at  present,  whilst  increasing  the  hazard  at- 
tendant upon  it  and  decreasing  the  earnings  derivable 
from  it.  The  entrance  to  the  field  in  the  past  decade  of 
a  great  number  of  new  companies  has  created  a  sec- 
tional feeling  which  has  had  a  detrimental  effect  on  the 
investment  and  other  branches  of  the  business. 

Insurance  funds  are  distributed  through  two  main 
fields  of  investment,  one  embracing  "slow  assets,"  such 
as  city  and  farm  properties;  the  other,  "quick  assets," 
such  as  bonds  and  stocks,  readily  marketable  on  the  ex- 
changes. The  former  class  returns  the  higher  rate  of 
interest,  but  the  latter  has  the  advantage  in  the  matter 
of  convertibility. 

Most  of  the  companies  specialize  in  certain  kinds  of 
investments,  the  choice  being  determined  by  peculiar 
conditions,  exceptional  experience  or  unusual  facilities. 

135 


One  company  has  the  bulk  of  its  assets  distributed  in 
small  farm  loans;  another  in  large  city  loans.  Each  has 
an  investment  department  especially  adapted  to  the  char- 
acter of  its  business,  just  as  a  third  company,  making- 
a  specialty  of  corporation  securities,  retains  the  services 
of  experts  in  that  class  of  investments. 

The  combined  and  individual  holdings  of  the  com- 
panies in  the  two  general  classes  of  investments  have 
fluctuated  markedly  in  correspondence  with  changes  in 
conditions  affecting  securities.  At  one  time  repudiation 
of  liabilities  by  certain  states  and  cities  had  a  depreciat- 
ing influence  on  all  kinds  of  bonds.  Fifty  years  ago 
farm  mortgages  in  the  middle  west  were  looked  upon 
with  disfavor.  They  are  now  among  the  most  sought- 
after  investments.  Since  the  setting  in  of  the  wave  of 
adverse  legislation  which,  during  late  years  has  been  di- 
rected against  industrial  and  public  utility  corporations, 
Life  Insurance  funds  are  not  invested  in  their  bonds  to 
to  anything  like  the  former  extent. 

During  the  period  from  1893  to  1903  the  Life  Insur- 
ance companies  doing  business  in  New  York  State  in- 
creased their  holdings  of  real  estate  mortgages  by  67  per 
cent.  In  the  following  decade  there  wras  a  further  in- 
crease of  140  per  cent.  Nevertheless,  the  companies  witn 
the  largest  assets  continued  to  have  a  very  much  greater 
proportion  of  them  invested  in  stocks  and  bonds  than 
in  real  estate  mortgages.  At  the  close  of  1913  the  twen- 
ty-nine leading  companies  had  in  the  aggregate  approxi- 
mately twro  billions  of  dollars  invested  in  stocks  and 
bonds  and  one  and  a  half  billions  in  mortgages.  A  simi- 
lar calculation  involving  all  the  companies  would  show 
that  at  the  present  time  the  Life  Insurance  funds  en- 
gaged in  one  of  these  classes  of  investments  about  equal 
the  funds  invested  in  the  other. 

Government,  state,  municipal,  county,  township  and 
school  district  bonds  are  considered  the  best  investments 
from  the  point  of  view  of  security,  and  long  term.  Dur- 
ing the  ten  years  of  1892  to  1902  almost  three  billions 
of  bonds  of  this  description  were  issued  on  which  the 
total  losses  aggregated  no  more  than  $287,000,  or  .0096 
per  cent. 

Standard  railroad  bonds  are  favored  by  Life  Insurance 
investors  on  account  of  safety,  long  term,  ready  convert- 

136 


ibility  and  tendency  to  appreciate  in  value.  Since  the 
first  publication  of  railroad  statistics  by  the  Interstate 
Commerce  Commission  in  1888  it  has  been  possible  to 
analyze  operating  results  and  check  up  reports  with 
sworn  returns.  Previous  to  that  year  railroad  statements 
had  generally  been  fragmentary,  defective  and  without 
audit.  The  investment  department  that  deals  extensively 
in  such  securities  will  make  its  own  investigations,  al- 
though it  may  be  guided  more  or  less  by  the  advice  and 
judgment  of  bond  houses  with  which  it  has  business 
relations. 

Bonds  of  public  service  concerns,  such  as  light,  power 
and  water  companies  and  those  of  industrial  corpora- 
tions are  not  generally  purchased  by  conservative  Life 
Insurance  companies.  The  former  are  dependable  on 
legislative  franchises  which  may  be  called  into  question. 
The  latter  are  too  much  dependable  on  the  •  personal 
equation. 

Quick  assets  or  readily  convertible  securities  return 
lower  rates  of  interest  than  those  earned  on  real  estate 
mortgages.  Nevertheless,  the  former  secure  a  consid- 
erable margin  over  the  rates  of  reserve  computation, 
which  are  3  and  Zl/2  per  cent.  The  average  rate  of  inter- 
est earned  by  the  twenty-nine  companies  referred  to 
above  was  4.61  per  cent  and  those  among  them  with  a 
larger  proportion  of  investment  in  securities  than  in 
mortgages  had  interest  earnings  on  their  total  assets 
ranging  from  4.36  to  4.89  per  cent. 

(If  the  limits  of  the  paper  permitted  it  would  be  ap- 
propriate to  discuss  amortization  in  this  connection. 
Amortization  is  the  gradual  extinction  of  premiums  or 
discounts  on  fixed-term  securities,  in  such  amounts  and 
regular  periods  as  to  bring  the  securities  to  par  at  ma- 
turity. The  method  is  applied  by  insurance  companies  to 
permanent  holdings  of  bonds  and  other  securities.) 

Although  large  profits  have  been  derived  by  com- 
panies from  the  possession  of  stocks,  investments  in  them 
have  been  subjected  in  recent  years  to  adverse  criticism 
and,  in  some  States,  to  prohibitive  legislation.  In  1900 
slightly  more  than  6  per  cent  of  the  total  Life  Insurance 
reserves  were  invested  in  stocks ;  in  1913  the  ratio  had 
fallen  to  less  than  2  per  cent.  The  speculative  element 
in  stocks  is  one  of  the  objections  urged  against  them. 

137 


A  stronger  one,  perhaps,  is  that  ownership  virtually  in- 
volves engagement  in  the  business  of  the  company  which 
issued  the  scrip.  The  Armstrong  investigation  disclosed 
the  fact  that  certain  companies  had  used  their  stock- 
holdings to  obtain  control  of  financial  institutions  and 
that  officers  and  directors  had  turned  the  condition  to 
their  personal  advantage. 

"Cash  in  hand,"  which  includes  funds  on  deposit  in 
banks  as  well  as  money  in  the  vaults,  is  an  item  which, 
on  account  of  its  limited  earning  power,  a  company 
should  maintain  at  a  figure  as  nearly  representing  its 
immediate  needs  as  possible,  but  in  addition  there  may 
be  at  any  time  considerable  sums  awaiting  investment. 
A  few  years  ago  several  large  companies  maintained  very 
heavy  and  quite  unnecessary  deposits  in  banks  and  trust 
companies.  Much  of  this  money  was  lent  under  condi- 
tions which  involved  high  rates  of  interest,  but  at  a  risk 
to  which  insurance  funds  should  not  be  exposed.  One 
company,  at  least,  relied  on  this  use  of  ready  money  to 
an  extent  that  considerably  reduced  the  proportion  of  its 
assets  in  permanent  interest-bearing  investments.  Such 
a  condition  cannot  be  remedied  readily,  for  time  is  re- 
quired to  make  investments  carefully  and  profitably,  not 
to  mention  the  difficulty  in  finding  opportunities  for  plac- 
ing large  sums. 

Western  Life  Insurance  companies  have  enjoyed  an 
advantage  over  those  in  the  East  from  the  investment 
of  the  largest  proportion  of  their  assets  in  farm  mort- 
gages. The  company  which  earns  the  highest  rate  of 
interest  on  its  mean  invested  assets  has  practically  all 
its  funds  engaged  in  this  field  of  investment.  It  is  one 
which  yields  a  much  larger  return  than  can  be  gained 
from  bonds  and  is  equally  safe,  provided  good  judgment 
is  exercised  in  making  loans  and  an  ample  margin  of 
value  is  contrived.  First  mortgages  in  conservative 
amounts  on  irrigated  producing  land  are  almost  as  liquid 
as  high-grade  bonds.  There  is  always  a  ready  market 
for  the  former  without  discount.  Eastern  companies  are 
awakening  to  a  fuller  appreciation  of  these  facts  and 
are  constantly  increasing  their  holdings  of  this  form  of 
investment,  several  of  them  maintaining  loan  agencies  in 
the  West  for  the  purpose. 

This  class  of    investment    business  requires    special 

138 


knowledge,  close  attention  and  much  detail  work.  The 
company  largely  interested  in  it  maintains  an  office  force 
experienced  in  the  particular  clerical  operations  incident 
to  it.  It  also  employs  experts  to  examine  and  pass  upon 
property  offered  as  security  and  to  appraise  its  value ; 
to  frequently  inspect  properties  on  which  the  company 
has  loans ;  to  report  deterioration  of  value  due  to  change 
of  condition,  neglect  of  improvements  and  repairs,  or 
other  causes.  The  legal  department  is  called  upon  to 
investigate  various  features  of  proposed  mortgage  trans- 
actions, such  as  questions  of  title,  character  of  encum- 
brances and  requirements  of  law.  The  loan  department 
employs  men  to  collect  interest  promptly,  to  see  that 
sound  fire  insurance  is  carried  and  renewed  in  season ; 
to  ascertain  that  taxes  and  various  municipal  or  town- 
ship assessments  are  met  in  good  time.  To  carry  on  all 
this  work  efficiently  a  knowledge  of  the  property  and 
tax  laws  of  many  states  is  necessary. 

It  is  a  fundamental  axiom  of  the  Life  Insurance  in- 
vestment business  that  loans  should  be  made  only  on 
property,  whether  real  estate  or  securities,  which  pro- 
duces a  sufficient  annual  income  to  meet  the  expenses 
connected  with  its  operations,  as  well  as  all  other  liabil- 
ities, such  as  interest  and  taxes. 

Conservative  investment  managers  avoid  loans  on 
property  the  value  of  which  is  derived  from  speculation, 
which  depends  largely  upon  personal  management  or 
which  is  susceptible  to  deterioration  by  the  influence  of 
chance  circumstances. 

First  mortgages,  only,  are  considered  and  an  ample 
margin  of  safety  is  secured.  The  usual  practice  is  to 
lend  not  more  than  50  per  cent  of  the  land  value,  regard- 
less of  improvements.  In  large  cities,  where  values  are 
measured  by  standards,  and  demand  is  constant,  the 
percentage  of  loan  is  often  greater.  On  the  other  hand, 
the  competition  reduces  interest  rates  and  the  dimin- 
ished margin  enhances  the  danger  of  loss. 

Properties  devoted  to  public  purposes,  such  as  hotels, 
apartment  houses,  theaters,  etc.,  are  subject  to  the  ob- 
jection that  in  case  of  foreclosure  they  entail  trouble- 
some supervision  and  expensive  maintenance. 

Notwithstanding  the  expense  attendant  on  extensive 
investment  in  real  estate  mortgages,  the  high  rate  of  in- 

139 


terest  derived  from  them  and  their  freedom  from  the 
market  fluctuations  that  affect  securities  make  them  the 
most  desirable  channel  for  the  employment  of  Life  In- 
surance funds.  An  intangible  but  not  the  less  actual  ad- 
vantage derived  from  small  loans  to  borrowers  on  real 
estate  security  is  that  of  numerous  business  connections 
with  co-incident  extension  of  good-will. 

Life  Insurance  companies  rarely  acquire  real  estate 
except  for  their  own  uses  or  through  foreclosure.  In  the 
latter  case  the  property  is  disposed  of  at  the  first  favor- 
able opportunity,  some  States  requiring  that  this  shall  be 
done  within  two  years.  Office  buildings,  wrhen  not  en- 
tirely occupied  by  the  companies  owning  them,  are  a 
source  of  revenue  and  allowance  is  generally  made  for 
their  advertising  value.  In  1884  the  real  estate  holdings 
of  the  companies  represented  10.94  per  cent  of  their  as- 
sets ;  in  1914  they  were  no  more  than  3.38  per  cent.  The 
diminution  in  the  percentage  is  probably  due  as  much  to 
marking  down  values  as  to  decrease  in  extent. 

The  solvency  of  a  company — its  ability  to  meet  its 
contractual  obligations — rests  upon  the  safety  and  profit 
with  which  its  reserves  are  invested.  As  net  premiums 
are  calculated  on  the  assumption  of  a  certain  minimum 
rate  of  interest  being  realized  on  the  reserves,  the  suffi- 
ciency of  the  former  is  dependent  on  the  latter  condi- 
tion. The  average  return  of  the  combined  investments 
of  all  Life  Insurance  companies  is  somewhat  more  than 
4.75  per  cent  which  is  1.25  to  1.75  per  cent  in  excess  of 
the  standard  rates  for  reserve  computations. 

In  case  of  the  average  rate  of  interest  on  a  company's 
reserves  falling  below  its  operating  rate  the  deficit  would 
be  made  up  from  its  surplus.  If  a  general  decline  in  fu- 
ture interest  rates  should  seem  probable,  a  prudent  com- 
pany would  anticipate  the  effect  of  such  a  development 
by  applying  a  portion  of  its  surplus  in  the  meantime  to 
the  reduction  of  its  security  valuations. 

In  computing  the  rate  of  interest  earnings,  Life  In- 
surance companies  use  a  method  differing  somewhat 
from  the  usual  practice.  On  this  point  Moir  says :  "If 
the  interest  earned  in  any  year  were  divided  by  the  funds 
invested  at  the  beginning  of  the  year,  then  those  com- 
panies which  had  a  large  increase  in  their 'funds  would 
appear  too  favorably  in  the  comparison.  On  the  other 

140 


hand,  if  the  year's  interest  were  divided  by  the  funds  at 
the  end  of  the  year  the  converse  would  hold.  For  meas- 
uring the  interest  earned  by  Life  Assurance  companies 
a  middle  course  is  usually  followed,  and  the  following 
formula  has  been  suggested  as  a  good  basis : 

21 
Average  rate  earned  = 


A+B— I 

In  which  I  represents  the  total  interest  earned  dur- 
ing the  year ;  A,  the  funds  at  the  beginning  of  the  year ; 
and  B,  the  funds  at  the  end  of  the  year." 

Further  study  of  this  question  may  be  made  by  read- 
ing the  following:  "The  Investments  of  Life  Insurance 
Companies,"  Zartman  ;  "Investment  of  Insurance  Funds," 
Lunger;  Yale  Insurance  Lectures;  "Life  Insurance  In- 
vestments," Hamer ;  "Insurance,"  American  Academy  of 
Political  and  Social  Science;  "Investment  of  Funds," 
Dawson,  in  "Business  of  Life  Insurance";  "The  Call  for 
Investments,"  Hurrell,  in  Proceedings  of  Life  Insurance 
Presidents. 


141 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

XIII 

121.  What  is  the  chief  consideration  in  the  investment 
of  Life  Insurance  funds? 

Safety. 

122.  Wide  distribution  is  generally  sought  in  the  invest- 
ment of  Life  Insurance  funds.      Why? 

For  the  same  reason  that  wide  distribution  of  risks 
is  sought — to  insure  average  experience. 

123.  Are  the  profits  from  investments  net? 

No,  the  cost  of  operation  is  charged  to  them. 

1  24.  What  protective  measure  has  recently  been  adopted 
by  a  number  of  companies  against  the  possibility  of 
excessive  premium  loan  demands  at  an  unfavorable 
time? 

The  inclusion  in  policy  contracts  of  a  clause  retain- 
ing to  the  company  the  right  of  deferring  such  loans 
for  sixty  or  ninety  days  after  application. 

125.  In  the  main,  what  classes  of  funds  are  represented 
in  Life  Insurance  "investments"  ? 

Reserves  and  General  Surplus. 


126.  Why  are  compulsory  local  investments  objection- 
able? 

They  increase  expense  and  hazard,  as  ivell  as  fre- 
quently decreasing  the  profits.  They  are  wrong 
in  principle  because  impossible  of  general  adoption. 

127.  In  what  two   classes  of  securities  are  the  bulk  of 
Life  Insurance  funds  invested? 

Bonds  and  Real  Estate  Mortgages. 

128.  What  class  of  investments  yields  the  highest  rates 
of  interest? 

Farm  Mortgages. 

1 29.  What    department    of   a   company   works   in    close 
co-operation  with  the  Investment  Department? 

Legal  Department. 

1  30.     In  making  real  estate  investments  what  proportion 
of  the  appraised  value  is  usually  lent? 

Not  to  exceed  50  per  cent,  regardless  of  improve- 
ments. 


XIV 

g>tate  gwperfateton  of  Htfe  Insurance 

BY  FORBES  LINDSAY 

The  Life  Insurance  contract,  the  relations  of  the  par- 
ties to  it  and  the  interests  involved  in  it  differ  in  several 
respects  from  the  contracts,  relations  and  interests  per- 
taining to  commercial  transactions. 

Life  Insurance,  as  a  business,  has  a  much  more  far- 
reaching  influence  upon  the  welfare  of  the  community 
at  large  than  any  commercial  enterprise  could  have.  The 
magnitude  of  Life  Insurance  in  America  and  the  large 
proportion  of  our  population  which  is  interested  in  it, 
invest  it  with  the  character  of  a  public  institution.  The 
guardianship  of  its  funds  and  the  fulfillment  of  its  obli- 
gations are  peculiarly  in  the  nature  of  a  sacred  trust. 
In  the  majority  of  instances  its  promises  are  redeemable 
only  after  the  death  of  the  insured,  and  then  to  widows 
and  orphans.  Its  principles  and  operation  are  so  little 
understood  by  the  public  that  mismanagement,  and  even 
dishonesty,  in  the  conduct  of  a  company  might  escape 
detection  by  its  policyholders  until  the  results  had  be- 
come irremediable! 

These  conditions  afford  sufficient  ground  for  the  su- 
pervision of  Life  Insurance  by  the  State,  the  advisability 
of  which  has  never  been  called  into  question.  Examina- 
tion of  the  early  laws  and  ordinances  relating  to  Insur- 
ance, which  date  back  to  the  13th  century,  clearly  indi- 
cates that  it  has  been,  from  its  inception,  subject  to  some 
degree  of  governmental  regulation.  This,  in  the  earlier 
period,  however,  was  generally  of  the  same  character  as 
the  regulation  exercised  over  corporations  in  general  and 
affected  by  the  same  laws. 

Previous  to  1885  Life  Insurance  companies  were  sub- 
ject only  to  general  laws  which  laid  down  the  conditions 
under  which  they  might  be  organized  and  operated. 
There  was  no  attempt  to  regulate  administration  or  man- 
agement. There  was  not  even  any  requirement  regard- 
copyrighted  1916.  by  Pacific  Mutual  Life  Insurance  Company  of  California 


ing  the  maintenance  of  reserves,  nor  were  detailed  re- 
ports demanded.  In  1852  the  State  of  New  Hampshire 
established  an  Insurance  Department  which,  however, 
appears  to  have  restricted  its  attention  to  fire  insurance 
for  several  years  after  its  inception.  The  first  State  de- 
partment to  assume  supervision  of  Life  Insurance  was 
created  by  Massachusetts  in  1855.  Four  years  later  New 
York  took  a  similar  step.  The  action  of  these  states  was 
gradually  followed  by  others  and  at  the  present  time 
every  State  and  Territory  exercises  close  supervision  over 
Life  Insurance  companies.  The  departments  or  bureaus 
are  supported  by  fees  and  taxes  collected  from  the  com- 
panies, the  amounts  received  by  the  several  States  being 
greatly  in  excess  of  the  cost  of  supervision.  Indeed, 
supervision  in  this  country  was  primarily  for  the  purpose 
of  raising  revenue,  which  is  still  one  of  its  chief  objects. 

The  States'  laws  governing  Life  Insurance  are  far 
from  uniform  and,  as  a  company  is  amenable  to  the  legis- 
lation of  every  State  and  Territory  in  which  it  does  busi- 
ness, the  larger  and  more  successful  concerns  are  subject 
to  forty  or  more  varying  and  occasionally  conflicting  sets 
of  laws,  together  with  as  many  differing  degrees  and 
methods  of  taxation. 

In  1859  the  Massachusetts  Insurance  Department 
adopted  a  definite  mortality  table  (Actuaries)  as  the 
standard  of  computation,  and  two  years  thereafter  estab- 
lished a  standard  of  solvency,  with  which  companies  ope- 
rating in  that  State  were  required  to  comply.  The  In- 
surance Department  of  the  same  State  was  responsible 
for  the  first  Non-forfeiture  law,  as  well  as  most  of  the 
early  reforms  in  the  business.  Now,  however,  several 
States  have  Life  Insurance  statutes  and  regulations 
equally  as  good  as  those  of  Massachusetts. 

A  general  requirement  of  the  insurance  laws  is  a  de,- 
posit  with  the  Treasurer  of  the  State  of  approved  secur- 
ities to  the  value  of  $100,000.  This  is  a  measure  of  little 
consequence  or  effect,  except  in  cases  of  new  companies, 
which  are  apt  to  exaggerate  its  importance.  Since  all  old 
line  companies  are  obliged  to  maintain  adequate  reserves, 
the  security  of  the  policyholder  is  equally  as  great 
whether  the  documents  representing  them  are  kept  in  the 
company's  vault  or  at  the  State  House.  So  long,  how- 
ever, as  the  insurance  commissioners  illogically  and  un- 

146 


justly  decline  to  admit  these  deposits  as  assets,  they  are 
in  the  nature  of  a  contingency  reserve. 

Though  the  insurance  laws  vary  greatly  in  different 
States  the  main  purposes  of  all  alike  are  to  insure  the 
solvency  of  companies,  to  guarantee  protection  of  policy- 
holders,  and  to  create  revenue  for  the  States.  A  com- 
pany must  comply  with  the  laws  of  ever  State  in  which 
it  operates,  and  in  order  to  secure  admission  to  a  State 
other  than  that  in  which  it  was  incorporated,  it  must  file 
a  detailed  statement  of  its  condition  and  methods  of 
business. 

The  insurance  departments  of  every  State  make  peri- 
odical examinations  of  domestic  companies.  Examina- 
tions are  in  some  cases  made  yearly  ,and  rarely  more 
than  three  years  apart.  Generally  the  resultant  certifi- 
cates are  accepted  by  the  commissioners  of  other  States, 
who  have,  however,  the  right  to  examine  at  any  time  any 
foreign  company  doing  business  in  their  territory.  These 
examinations,  which  are  made  at  the  expense  of  the  com- 
pany, used  to  be  unnecessarily  frequent.  A  great  deal 
of  trouble  and  expense  is  now  avoided  by  the  operation 
of  the  National  Association  of  Insurance  Commissioners, 
which  is  entrusted  with  the  task  of  securing  information 
for  the  departments  in  general.  The  work  of  its  commit- 
tee has  no  effect,  however,  upon  the  periodical  examina- 
tions by  commissioners  of  their  home  companies.  These 
inspections  are  usually  restricted  to  the  transactions  of 
the  company  in  the  previous  year,  and  verification  of 
its  assets  and  liabilities. 

All  the  Legal  Reserve  companies  are  required  to  file 
detailed  annual  reports  with  the  insurance  departments 
of  every  State  in  which  they  do  business.  This  was  an 
onerous  task  when  wide  variance  existed  between  the 
character  of  reports  demanded  by  different  States.  Of 
late  years  there  has  been  a  tendency  toward  uniformity 
and  greater  detail  of  statement.  The  annual  report  con- 
veys analytical  information  of  the  company's  financial 
and  general  standing;  the  nature  of  its  risks  and  con- 
tracts; the  character  and  extent  of  its  income  and  out- 
lays ;  the  amounts  of  its  reserve  and  surplus,  together 
with  the  manner  of  investing  the  funds  representing 
them ;  lapses  and  medical  examinations ;  salaries  and 
commissions;  and,  in  short,  the  most  minute  particulars 

147 


of  its  business.  The  Annual  Statement,  published  by 
every  company  as  soon  as  possible  after  the  close  of  the 
year,  is  a  summary  of  the  report  made  to  the  insurance 
departments  of  the  States  in  which  the  company  operates. 

The  student  will  profit  by  a  study  of  the  detailed  state- 
ment of  a  Life  Insurance  company  as  found  in  any  of 
the  published  reports  of  the  insurance  departments,  the 
statement  of  the  Pacific  Mutual  being  recommended  as 
typical.  In  this  connection  the  following  explanation 
will  aid  the  understanding. 

Under  "Income"  are  several  items  of  dividends  and 
surrender  values  "applied''  to  various  purposes.  These 
items  appear  again  under  "Disbursements,''  but  they  are 
neither  received  nor  paid  out  and  actually  represent 
transfers  of  credits  on  the  books. 

"Consideration  for  original  annuities  involving  life 
contingencies"  and  "Consideration  for  supplementary 
contracts  not  involving  life  contingencies,"  are  not  re- 
ceipts in  reality  but  are  based  on  the  fact  that  at  the 
maturity  of  a  policy  the  claim  under  which  is  to  be  paid 
as  an  annuity  or  by  instalments,  the  present  value  of 
the  future  payments  is  entered  as  a  death  loss  or  endow- 
ment settlement  in  the  "Disbursements"  and  offsets  the 
above-mentioned  items  under  "Income."  For  instance, 
a  claim  entailing  a  monthly  income,  payable  during  the 
life  of  a  beneficiary,  would  show  in  the  former  classifi- 
cation of  "consideration" ;  if  the  payments  were  to  be 
limited  to  a  certain  number  of  years,  the  item  would  fall 
into  the  latter  classification. 

It  will  be  noticed  that  a  company's  main  source  of 
income  is  from  premium  receipts.  These  are  reported 
under  several  headings.  "First  year's  premiums  on 
original  policies"  of  course  refers  to  the  initial  payment 
due  on  the  issuance  of  a  contract.  "Renewal  premiums" 
are  all  those  succeeding  the  first.  "Extra  premiums  for 
total  and  permanent  disability  benefits."  The  charge  for 
the  benefit  in  question  is  included  in  the  policy  premium 
and  not  shown  separately  in  the  contract  or  rate  book. 
The  laws  of  several  States  require,  however,  that  a  spe- 
cific charge  be  made  for  the  benefit.  "Net  amount  of 
uncollected  and  deferred  premiums."  (Mem.  The  word 
"defaulted"  in  the  California  Insurance  Report  (47th) 
should  read  "deferred.")  Theoretically  all  Life  Insur- 

148 


ance  premiums  are  payable  for  an  entire  year  in  advance. 
In  practice  the  companies  accept  semi-annual  and  quar- 
terly payments.  The  insured  is,  however,  liable  for  a 
complete  year's  premium  and  in  the  event  of  death  oc- 
curring before  any  unpaid  portion  becoming"  due,  it 
would  be  deducted  from  the  amount  of  the  claim.  Such 
unpaid  proportional  premiums  are  termed  "deferred  pre- 
miums" and  companies  are  properly  permitted  to  list 
them  under  "Assets."  "Uncollected"  or  "unreported" 
premiums  are  those  on  policies  in  process  of  delivery, 
settlements  for  which  have  not  yet  reached  the  home 
office. 

The  reserves  constitute  by  far  the  largest  proportion 
of  the  liabilities.  Of  the  remaining  items  under  this  head 
the  largest  is  the  surplus  fund  held  for  "apportionment 
upon  deferred  dividend  policies."  Other  items  of  con- 
sequence are  "dividends  declared  or  apportioned,"  and 
policy  claims  in  suspense,  mostly  death  losses  reported 
and  in  process  of  settlement. 

As  receipts  and  outlays  on  account  of  investments 
generally  represent  changes  in  assets  without  material 
increase  or  decrease,  this  movement  of  funds  is  not  noted 
in  the  statement,  but  an  investment  exhibit  is  attached 
to  it. 

The  Gain  and  Loss  Exhibit,  which  is  a  brief  summa- 
tion of  the  year's  transactions,  shows  large  gains  from 
mortality  savings  and  excess  interest  earnings.  The 
"loss  from  loading"  is,  to  a  large  extent  at  least,  tempo- 
rary. Such  a  condition  will  always  appear  in  the  state- 
ments of  companies  selling  Non-participating  insurance 
to  any  considerable  extent.  As  has  been  explained  in 
one  of  the  preceding  papers,  in  making  Non-participating 
rates,  future  gains  are  anticiupated.  The  flat  premium 
is  made  with  a  very  low  margin  for  expenses — altogether 
too  low  to  take  care  of  the  first  year's  cost — and  later 
gains  from  mortality  saving  and  interest  earning  are 
depended  upon  to  make  up  the  initial  "loss  from  load- 
ing." 

It  will  be  noted  that  "investment  expenses"  are 
charged  against  the  interest  earned. 

The  laws  of  all  states  require  that  the  companies  shall 
maintain  a  specific  reserve,  but  the  requirement  is  not 
uniform.  On  policies  issued  prior  to  1900  the  legal  re- 

149 


serve  is  generally  based  on  the  American  Experience 
Table  and  4  per  cent  interest.  For  insurance  of  later 
issue  the  standard  in  most  States  is  3%  per  cent,  though 
a  few  States  still  maintain  the  4  per  cent  basis  for  all 
business.  Companies  making  their  computations  on  a 
lower  basis  than  that  allowed  by  a  State  are,  neverthe- 
less, required  to  maintain  reserves  consistent  with  their 
own  standard. 

A  number  of  laws  are  directed  toward  securing  equit- 
able and  impartial  treatment  of  policyholders.  Most 
States  prohibit  any  discrimination  between  policyholders 
of  the  same  class  and  age  in  the  matters  of  rates,  benefits 
and  contract  conditions.  With  very  few  exceptions,  of 
which  California  is  one,  the  States  have  laws  prohibiting 
any  agent  or  other  representative  of  a  company  from  giv- 
ing any  rebate  of  a  premium  directly  or  indirectly,  or 
offering  any  consideration  not  contained  in  the  contract 
as  an  inducement  to  insure.  In  a  number  of  states  the 
use  of  stock,  "advisory  board  agreements''  and  similar 
inducements  to  insure  are  illegal. 

Laws  in  some  States  prescribe  methods  of  dividend 
distribution  and  limit  the  amount  of  accumulated  surplus 
which  a  company  may  retain.  Legal  restrictions  have 
also  been  placed  upon  expenses,  salaries  and  other  de- 
tails of  administration. 

State  supervision  has  unquestionably  wrought  import- 
ant improvements  in  the  Life  Insurance  business  and 
beneficially  affected  the  interests  of  policyholders.  By 
establishing  standards  of  solvency,  it  has  compelled  con- 
servative management,  eliminated  wild-cat  concerns  and 
created  public  confidence.  By  the  passage  of  non-for- 
feiture and  similar  protective  measures  the  States  have 
promoted  the  welfare  of  policyholders.  The  publicity 
incident  to  the  supervision  of  the  insurance  departments 
has  had  a  generally  good  effect  on  the  conduct  of  the 
business. 

On  the  other  hand,  State  supervision,  with  its  multi- 
plicity of  varying  laws,  its  numerous  centers  of  authority 
and  control,  its  costly  and  not  infrequently  inefficient 
administration,  is  not  at  present  a  satisfactory  institution. 
The  insurance  companies  keenly  feel  the  burdens  and 
vexations  to  which  policyholders  are  generally  oblivious, 

150 


although  the  consequences  fall  directly  upon  them  as  the 
purchasers  and  owners  of  the  insurance  affected. 

The  chief  abuse  connected  with  State  supervision  lies 
in  the  system  of  taxation.  In  this,  as  in  other  insurance 
legislation,  no  attempt  at  uniformity  is  made.  The  rate 
of  tax  ranges  from  1  to  3  per  cent,  and  in  some  States, 
counties  and  municipalities  impose  additional  levies. 
The  taxes  and  fees  collected  from  the  companies  aggre- 
gate more  than  $12,000,000  annually.  It  is  needless  to 
say  that  this  sum  is  greatly  in  excess  of  the  expense 
incurred  in  administering  the  several  insurance  depart- 
ments. 

In  general  the  State  tax  is  imposed  on  gross  premi- 
ums, the  assumption  being  that  they  represent  income 
in  the  ordinary  sense  and  include  a  large  proportion  of 
profit.  As  a  matter  of  fact,  Life  Insurance  premiums  are 
funds  collected  for  the  purpose  of  distribution  and  mainly 
represent  liabilities,  losses  and  expenses,  neither  of  which 
is  subject  to  taxation  in  any  other  business. 

Representatives  of  Life  Insurance  are  divided  on  the 
subject  of  remedy,  one  party  looking  for  relief  in  Federal 
supervision,  the  other  resting  its  hopes  on  reform  of  the 
present  system.  The  difficulties  in  the  way  of  Federal 
supervision^appear  to  be  insurmountable  and  it  is  by  no 
means  certain  that  the  expected  improvement  would  re- 
sult from  its  attainment.  On  the  other  hand,  there  is 
nothing  inherently  defective  or  weak  in  State  supervision 
and  the  clearest  road  to  eradication  of  the  existing  ob- 
jections to  it  would  seem  to  lie  in  co-operation  of  all  in- 
surance companies  with  that  end  in  view. 

The  following  sources  of  further  information  are  rec- 
ommended: "Principles  of  Insurance,"  Gephart;  "Busi- 
ness of  Life  Insurance,"  Dawson ;  "Mistakes  in  State 
Regulation,"  Zartman,  in  "Yale  Readings  in  Insurance"; 
Proceedings  of  Association  of  Life  Insurance  Presidents ; 
"Federal  Regulation  of  Insurance,"  J.  M.  Taylor ;  "State 
Supervision,"  T.  W.  Blackburn. 


151 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

XIV 

131.  When  was  Life  Insurance  first  subjected  to  govern- 
mental regulation? 

At  its  inception. 

1 32.  Where   did   the   Non-forfeiture   provision   and    the 
Standard  of  Solvency  originate? 

With  the  Massachusetts  Insurance  Department  in 
1859. 

133.  A  State  standard  of  reserve  is  3J/2   per  cent.      A 
company  doing  business  in  it  makes  its  calculations 
on  a   3  per  cent  basis.      What  reserve  would  the 
company  be  required  to  maintain? 

A  3  per  cent  reserve. 

1 34.  What  is  the  chief  benefit  that   has  accrued   from 
State  Supervision? 

By  establishing  standards  of  solvency  it  has  com- 
pelled conservative  management  and  created  public 
confidence. 

1 35.  Name    some    other    advantages    that    have    been 
wrought  by  State  Supervision. 

It  has  led  to  the  passage  of  many  laws  favorable  to 
policyholders.  It  has  eliminated  unsound  and  spec- 


ulative  methods  of  business.  It  has  brought  about  a 
wholesome  degree  of  publicity. 

1  36.     Name  some  of  the  disadvantages  of  State  Super- 
vision. 

It  is  the  cause  of  a  multiplicity  of  varying  and 
sometimes  conflicting  laws.  It  has  occasioned  ex- 
cessive taxation.  It  entails  upon  the  companies  a 
needless  amount  of  regulation  and  work. 

1  3  7.     What  is  the  usual  method  of  imposing  a  state  tax 
on  Life  Insurance? 

By  charging  a  certain  percentage  of  gross  premiums. 

1  38.     What  is  the  fundamental  error  in  State  taxation  of 
Insurance  premiums? 

The  assumption  that  they  represent  income  in  the 
ordinary  sense  and  include  a  large  proportion  of 
profit.  As  a  matter  of  fact,  they  are  funds  collected 
for  the  purpose  of  distribution  and  mainly  represent 
liabilities,  losses  and  expenses,  neither  of  which  are 
subject  to  taxation  in  any  other  business. 

1  39.     What  are  the  chief  items  in  the  annual  report  of 
an  Insurance  company  to  an  Insurance  Department? 

Information  as  to  a  company's  financial  and  general 
standing;  the  nature  of  its  risks  and  contracts;  char- 
acter and  extent  of  its  income  and  outlay;  the 
amounts  of  its  reserves  and  surplus,  together  with 
the  manner  of  investing  the  funds  representing 
them;  lapses  and  medical  examinations;  salaries  and 
commissions. 

1  40.     What  would  appear  to  be  the  best  remedy  for  the 
defects  of  State  Supervision? 

Co-operation  of  all  the  interests  involved  in  an 
honest  effort  to  improve  the  system. 


XV 


Snsurance 

$art  I 

HISTORY  AND  DEVELOPMENT 

BY  FORBES  LINDSAY 

Life  and  Casualty  insurance  trace  back  through  the 
British  Friendly  Societies  and  medieval  guilds  to  the 
Greek  and  Roman  fraternities  which  combined  in  their 
functions  religious,  social,  trade  and  provident  features. 

Of  the  various  beneficial  associations  which  ante- 
dated the  Friendly  societies,  none  attempted  to  define 
precisely  the  casualties  aaginst  the  consequence  of 
which  it  undertook  to  provide,  nor  the  contributions  of 
members  to  meet  the  cost  of  provision.  By  placing  the 
protection  upon  a  definite  basis  as  to  risks,  indemnity 
and  assessments  the  Friendly  Societies  originated  some 
of  the  fundamental  features  of  modern  life  and  accident 
insurance.  Indeed,  the  Societies  went  further  than  do 
the  present  day  insurance  companies,  in  as  much  as  the 
former  provided  for  invalidity  arising  from  old  age,  a 
risk  which  life  companies  do  not  contemplate  at  all 
and  Casualty  companies  avoid  by  terminating  their 
contracts  before  the  possibility  of  its  occurrence.  In 
fact,  a  large  proportion  of  the  relief  afforded  by  bene- 
ficial societies  and  fraternal  orders  in  Europe  and 
America  has  always  consisted  of  payments  to  injured 
and  invalid  members. 

Old  age  invalidity  is  provided  for  in  most  of  the 
systems  of  State  or  Social  insurance.  Its  absence  from 
the  plans  of  personal  protection  operated  by  insurance 
companies  is  the  one  thing  needed  to  make  those  plans 
completely  effiective. 

ACCIDENT  AND  HEALTH  INSURANCE 

Several  corporations  were  formed  in  England  for  the 
purpose  of  Accident  underwriting  during  the  former 

Copyrighted  1916.  by  the  Pacific  Mutual  Life  Insurance  Company  of  California 


half  of  the  nineteenth  century.  It  does  not  appear^ 
however,  that  any  of  them  actually  entered  into  the 
business  before  the  Railway  Passengers'  Assurance 
Company  which  was  chartered  in  1849  and  immediately 
became  active.  The  protection  afforded  by  the  com- 
pany was  restricted  to  the  hazards  involved  in  railroad 
travel.  At  that  time  the  risk  was  very  much  greater 
than  at  present  and  the  public  estimation  of  it  was,  as 
it  is  today,  an  exaggerated  one.  The  physical  form  of 
the  company's  contract  was,  and  still  is,  a  ticket  issued 
to  cover  a  particular  journey,  or  a  period  of  twenty- 
four  hours. 

The  inception  of  Accident  Insurance  in  the  United 
States  was  marked  by  the  organization  of  the  Travelers' 
Insurance  Company  in  1863.  Its  promoter  derived  his 
idea  of  the  project  from  the  Railway  Passengers'  Assur- 
ance Company  and  at  the  outset  adapted  its  system 
to  the  operation  of  the  "Travelers." 

A  few  companies  had  been  incorporated  in  Massa- 
chusetts during  the  forties  for  the  purpose  of  granting 
Health  Insurance.  The  proposition  failed  to  excite 
sufficient  public  response  to  justify  their  existence  and 
two  of  these  concerns  secured  modifications  of  their 
charters  with  a  view  to  writing  Accident  Insurance. 
They  were  hardly  more  successful  in  this  than  in  the 
former  venture  and  it  was  not  until  the  business  of  the 
Travelers  developed  that  Accident  Insurance  became 
established  in  this  country. 

At  first  the  coverage  was  confined  to  injuries  sus- 
tained in  railroad  and  steamboat  travel.  A  number  of 
companies  were  formed  to  assume  this  risk.  Some  of 
these  companies  failed  and  survivors  were  ultimately 
absorbed  by  the  Travelers.  The  entire  operation  of 
exclusive  travel  insurance  was  assigned  to  a  Ticket  De- 
partment which  is  still  a  branch  of  the  company's  organi- 
zation. The  business  developed  rapidly  and  was 
extended  to  embrace  accidental  injuries  of  all  kinds. 

In  1898,  following  a  period  of  failure  on  the  part  of 
numerous  Health  Insurance  companies,  the  Accident 
companies  began  to  furnish  weekly  indemnity  for 
disability  occasioned  by  sickness.  The  diseases  covered 
were  at  the  outset  confined  to  the  three  most  violent 
fevers,  smallpox,  cholera  and  measles.  By  degrees,  and 

154 


coincident  with  the  extension  of  Accident  coverage, 
policies  were  issued  to  embrace  a  greater  number  of 
diseases  until  sickness  from  practically  any  cause  was 
•covered. 

During  the  past  fifty  years  the  business  of  casualty 
insurance  has  been  extended  to  liability,  plate  glass, 
burglar,  elevator,  motor  car,  fidelity  and  other  forms 
of  protection. 

There  are  at  this  day  upwards  of  sixty  companies  in 
the  United  States  transacting  personal  accident  insur- 
ance. As  with  Life  Insurance,  the  bulk  of  the  business 
is  in  the  hands  of  a  few  well-established  and  thoroughly 
organized  concerns. 

It  is  estimated  that  claims  emanate  from  somewhat" 
more  than  10  per  cent,  of  the  policies  issued.  About 
1.30  per  cent,  of  the  claims  growing  out  of  accidental 
injuries  represent  fatalities,  but  the  sums  paid  on  the 
latter  account  aggregate  about  one-third  of  the  com- 
panies' losses. 

The  ratio  of  accidents  sustained  by  persons  who 
work  in  the  occupations  for  which  they  were  insured  is 
somewhat  less  than  70  per  cent,  of  all  accidents  for 
which  claims  have  been  paid.  Leaving  out  of  the 
calculation  accidents  suffered  in  the  pursuit  of  regular 
occupation,  claims  have  arisen  from  injuries  in  the 
following  ratios: 

At  home  25.9  per  cent;  pedestrians  18.2  per  cent; 
automobiles  11.1  per  cent;  recreation  11.0  per  cent; 
horses  and  vehicles  9.9  per  cent;  street  car  travel  7.2 
per  cent;  railway  travel  4.3  per  cent;  bicycles  1.2  per 
cent;  steamship  travel  1.0  per  cent;  miscellaneous 
10.2  per  cent. 

These  figures  are  not  to  be  accepted  as  an  indication 
that  the  hazards  to  which  a  man  is  exposed  at  home  are 
unusually  great  or  numerous.  The  explanation  is  to  be 
found  in  the  obvious  fact  that  a  very  large  proportion 
of  policyholders  are  daily  liable  to  accidents  which  may 
occur  at  home,  whilst  very  few  comparatively  travel 
by  steamship,  for  instance.  The  low  percentages  for 
this  and  other  travel  items  in  the  table  do,  however, 
indicate  a  great  decrease  in  the  dangers  associated  with 
them  since  the  inception  of  accident  insurance.  With 
reduction  of  the  hazard  in  this  direction  has  arisen 

155 


in  others  a  counterbalancing  growth  of  risks,  notably 
those  connected  with  the  automobile. 

At  present  the  usual  contract  is  one  running  for  a 
year  and  providing  indemnity  for  death,  dismemberment 
and  temporary  disability  incurred  as  a  result  of  accident. 
The  basic  unit  of  such  contract  is  $1,000  death  indem- 
nity and  $5  a  week  for  disablement.  On  this  basis 
policies  are  issued  up  to  100  units.  The  classification 
of  risks  is  regulated  by  occupations.  Professional  and 
business  men  compose  the  preferred  or  "A"  class. 
From  this  there  is  a  gradation  through  several  classifi- 
cations to  the  most  hazardous  which  will  be  covered. 
Beyond  these  various  grades  of  insurable  risks  are  a 
number  of  prohibited  classes  to  which  protection  can 
not  be  extended  at  any  rates  that  would  be  practicable. 

In  its  early  stages  the  business  was  necessarily 
experimental  and  the  classification  of  risks  was  based 
on  more  or  less  faulty  data.  Policies  and  rates  changed 
with  great,  but  gradually  decreasing,  frequency  as 
experience  furnished  a  constantly  enlarging  volume  of 
facts  from  which  to  deduce  calculations.  Present 
premiums  and  classifications  are  largely  based  on  the 
statistics  of  a  number  of  companies  made  generally 
available.  Thus  certain  standards  have  been  estab- 
lished, which  are  observed  by  all  Accident  underwriters, 
with  slight  modifications  prompted  by  judgment  in 
particular  cases. 

Individual  companies  have  done  much  in  the  di- 
rection of  collecting  and  analyzing  facts  bearing  on 
the  risk  of  injury  and  disablement  among  different 
classes  of  men,  but  there  has  not  been  such  a  union  of 
information  sources  as  among  Life  Insurance  companies 
and  it  cannot  be  said  that  there  is  as  yet  a  science  of 
Accident  Insurance  in  the  sense  that  there  is  a  science  of 
Life  Insurance.  There  are  not,  for  example,  any  casualty 
figures  which  are  universally  accepted  and  used  as  are  the 
mortality  tables.  In  the  Accident  business  premiums  and 
reserves  are  not  based  on  standard  tables  but  are  largely 
governed  by  the  judgment  and  experience  of  individual 
managers,  who  act  for  their  companies  in  the  capacities 
that  are  filled  by  actuaries  in  Life  Insurance  companies. 
There  is,  however,a  constant  approach  toward  uniformity 
and  percision  aided  by  the  increasing  experience  of  the 

156 


Accident  companies.  A  valuable  addition  to  the  ex- 
isting data  should  be  found  in  the  casualty  statistics 
which  the  Government  has  been  compiling  for  several 
years  past.  These  embrace  records  of  accidental  in- 
juries sustained  among  the  75,000  employees  who  come 
under  the  Compensation  Act  of  1908  and  also  among 
all  others  of  the  300,000  persons  in  the  Federal  service. 

Beginning  in  a  desire  to  give  as  complete  protection 
as  feasible  and  stimulated  by  competition,  the  Accident 
policy  has  undergone  constant  extension  and  ampli- 
fication, until  it  is  now  laden  with  multiform  "frills." 
The  benefits  commonly  included  surgeon's  fees,  hospital 
expenses,  beneficiary  insurance,  double  indemnity,  ap- 
plied under  same  contracts  to  temporary  disability, 
cumulative  increase  and  a  number  of  minor  features. 
The  extra  benefits  have  mostly  been  added  without 
corresponding  increase  of  premium  rates  and  with  con- 
sequent reduction  in  the  profits  of  the  business.  The 
limit  of  practical  liberality  has  been  reached  and  there 
are  signs  of  impending  reaction.  The  reformative 
movement,  whether  it  originates  with  the  companies 
or  is  enforced  by  the  Insurance  commissioners,  is  likely 
to  effect  the  elimination  of  non-essentials  from  the 
contract  and  compensatory  improvement  in  the  funda- 
mental features  of  protection. 

There  is  a  close  approach  to  uniformity  in  the 
essential  features  of  latter-day  Accident  and  Health 
policies.  This  is  mainly  due  to  the  Standard  Provisions 
Law  of  January  1st,  1914,  which  is  effective  in  a  number 
of  states.  The  Act  in  question  provides  for  the  incor- 
poration of  twenty  provisions  in  Accident  contracts  and 
the  use  of  uniform  phraseology  in  setting  them  forth. 
A  few  of  the  provisions  are  optional  and  additional 
provisions  are  permissible  on  condition  that  they  do 
not  conflict  with  the  Act. 

The  subjects  of  the  principal  Standard  Provisions 
are  as  follows:  1.  Insuring  clause;  2.  Statements 
made  in  the  application;  3.  Reinstatement  of  policy; 
4  and  5.  Obligation  on  the  part  of  the  insured  or 
beneficiary  to  notify  company  of  injury;  6.  Require- 
ment that  company  shall  furnish  forms  for  proofs  of 
loss;  7.  Limit  of  time  for  filing  proofs;  8.  Company's 
right  to  make  medical  examination  or  autopsy;  9.  Pro- 
vision for  payment  immediatey  after  receipt  of  proof; 

157 


10.  Provision  for  payments  every  eight  weeks  on  ac- 
count of  extended  claims;  11.  Provision  for  payment 
of  certain  indemnities  to  beneficiary  and  certain  others 
to  insured;  12.  Right  of  insured  to  cancel  policy  and 
receive  unearned  premium  in  case  of  changing  occu- 
pation to  one  less  hazardous  than  that  under  which  he 
is  insured;  13.  Right  of  revocation;  14.  Limits  of 
time  for  bringing  suit;  15.  Right  of  company  to  cancel 
policy. 

Accident  Insurance  business  is  conducted  upon  two 
general  plans  of  operation;  these  are  Stock  Company 
and  Assessment.  Under  the  former  plan,  the  policies  are 
issued  by  correspondence  at  fixed  rates,  supported  by 
adequate  reserves.  By  far  the  greater  part  of  the 
Assessment  business  is  done  by  Fraternal  Orders  and 
similar  associations. 

The  business  of  the  Stock  Companies  falls  into  four 
general  divisions  as  follows: 

1.  Commercial  Accident  Insurance.     This  is  by  far 
the  largest  part  of  the  business.     Its  patrons  are  men 
in  the  ordinary  walks  of  life. 

2.  Industrial   Accident   Insurance.     This   is   sold   to 
the  classes  which  carry  Industrial  Life  Insurance.     The 
premiums  are  payable  monthly. 

3.  Ticket  Accident  Insurance.     This  is  written  for 
short  periods  at  a  daily  rate,  for  the  benefit  of  travelers 
chiefly. 

4.  Workmen's    Collective   Insurance.       This      form, 
which  is  fast  falling  into  disuse,  indemnifies  the  insured 
for  payments  which  he  may  make  to  workmen  injured 
in  his   service. 

Several  of  the  Life  Insurance  companies  write  Acci- 
dent Insurance  through  separate  departments  or  in 
conjunction  with  their  Life  policies.  Most  of  the  Acci- 
dent Insurance  companies  do  business  in  various  other 
lines  of  Casualty  insurance.  The  Stock  Companies  are 
generally  well  established  and  fortified  by  ample  capital 
and  surplus.  These  companies  pay  annually  in  Acci- 
dent and  Sickness  claims  sums  aggregating  about  $20,- 
124,067. 

INDUSTRIAL  ACCIDENT  AND  HEALTH  INSURANCE 

The  foregoing  applies  in  the  main  to  the  Commercial 
branch  of  the  business.  This  had  been  practical  during 

158 


many  years  before  Industrial  Accident  and  Health 
Insurance  was  introduced.  The  first  company  to 
operate  the  latter  form  of  protection  was  organized  in 
1891.  The  plan  became  immediately  popular  and  new 
companies  entered  the  field  in  rapid  succession.  There 
are  at  the  present  time  upwards  of  100  companies  in 
the  United  States  engaged  exclusively  or  chiefly  in  this 
department  of  the  business,  not  to  mention  the  numer- 
ous fraternal  and  beneficial  associations  that  furnish  a 
similar  kind  of  protection. 

Industrial  Accident  and  Health  Insurance  filled  a 
highly  important  field  and  meets  a  distinct  need.  It 
is  not,  however,  in  as  prosperous  a  condition  as  it 
should  be.  Keen  competition  has  enhanced  the  cost 
of  securing  new  business  and  has  led  to  the  issuance 
of  policies  granting  greater  benefits  than  the  companies 
can  well  afford  to  give  for  the  premium  charged.  This 
tendency  to  over-liberality  has  characterized  the  Com- 
mercial business  in  late  years.  In  the  latter  case,  how- 
ever, whilst  the  condition  has  resulted  in  reducing 
profits  to  an  almost  negligible  quantity,  it  has  not 
introduced  an  element  of  danger,  because  an  extensive 
experience  has  established  the  cost  of  carrying  Com- 
mercial risks  on  a  basis  of  practical  precision.  As 
much  can  not  be  said  of  Industrial  Accident  and  Health 
Insurance  which  has  been  in  operation  for  a  compara- 
tively short  period. 

Workmen's  Compensation  does  not  appear  to  have 
exercised  an  adverse  effect  upon  the  industrial  business 
so  far.  On  the  contrary,  a  number  of  large  companies 
report  their  greatest  gains  of  recent  years  in  States 
where  compensation  statutes  are  in  force.  This  is 
doubtless  due  to  the  fact  that  the  widespread  legislation 
dealing  with  the  matter  has  brought  insurance  forcibly 
to  the  atention  of  wage-earners  and  to  the  extra  efforts 
put  forth  by  the  companies  in  order  to  conteract  the 
encroachment  in  their  field  of  operation.  The  task  of 
holding  their  own  will  grow  more  difficult  for  the  In- 
dustrial companies,  with  the  passage  of  time,  in  view 
of  the  fact  that  the  coverage  of  Workmen's  Compensa- 
tion is  constantly  broadening  and  will  shortly  be  ex- 
tended to  occupational  diseases.  The  companies  can  be 
successful  in  meeting  the  threatened  competition  only 


159 


by  effecting  a  substantial  decrease  in  their  expense  and 
lapse  ratios. 

It  is,  of  course,  not  at  all  improbable  that  compulsory 
insurance  will  prove  unsatisfactory  in  this  country,  as  it 
has  in  other  countries,  and  that  the  function  of  pro- 
viding protection  for  working  classes  will  be  left  in 
the  hands  of  insurance  companies. 

WORKMEN'S  COLLECTIVE  INSURANCE 

This  is  in  effect  Casualty  Group  Insurance.  It  is  the 
insurance  against  accident  under  one  policy  of  a  number 
of  workmen.  Workmen's  Collective  Insurance  origi- 
nated in  England,  when  it  was  called  "Jomt  Insurance" 
because  its  coverage  embraced  both  the  employer's 
liability  and  the  personal  insurance  of  his  employers. 
This  combination  never  obtained  in  the  United  States, 
but  here  the  liability  and  collective  policies  are  almost 
always  carried  concurrently. 

Workmen's  Collective  Insurance  benefits  comprise 
indemnity  for  the  following  results  of  accidental  injury : 
1.  Death.  2.  Loss  of  one  or  more  limbs.  3.  Loss  of 
an  eye  or  entire  sight.  4.  Temporary  disability  involv- 
ing loss  of  time.  The  policy  usually  contemplates  only 
the  occupational  hazard,  but  the  protection  is  sometimes 
extended  over  the  twenty-four  hours  at  an  increase  of 
15  per  cent,  in  the  cost.  The  premium  which  is  based 
upon  the  payroll,  is  sometimes  divided  between  em- 
ployer and  workmen  and  sometimes  entirely  paid  by 
one  or  the  other. 

Workmen's  Collective  Insurance  has  not  grown 
to  important  proportions  in  this  country,  although  it  is 
undoubtedly  advantageous  to  wage-earners.  Perhaps 
the  chief  of  several  causes  militating  against  its  ex- 
tension is  the  antagonism  of  Trades  Unions,  many  of 
which  have  insurance  branches  of  their  own.  In  the 
States  which  have  instituted  Workmen's  Compensation 
there  is  no  longer  any  scope  for  the  former  system. 

LIABILITY  INSURANCE 

Since  the  earliest  times  the  Common  Law  of  Eng- 
land has  imposed  upon  the  master  responsibility  for 
injuries  suffered  by  his  servant.  His  liability  was 
very  limited,  however,  and,  in  the  absence  "bf  special 
agreement,  practically  restricted  to  cases  involving 

160 


negligence  on  his  part.  An  obligation  rested  on  the 
employer  to  furnish  the  workman  with  fit  tools  and 
a  suitable  place  for  his  labor;  to  acquaint  him  with 
the  hazards  of  his  employment  and  to  refrain  from 
associating  with  him  incompetent  workmen. 

In  defense  of  an  action  for  damages  based  on  acci- 
dental injury  to  an  employee,  the  employer  had  three 
particular  resources,  the  establishment  of  any  one  of 
which  would  defeat  recovery  by  the  employee. 

These  were  as  follows:  1.  The  defense  of  "assump- 
tion of  risk."  This  depended  upon  a  showing  that  the 
injury  resulted  from  a  risk  inherent  to  the  occupation. 
2.  The  defense  of  "the  fellow-servant  rule,"  which  held 
when  the  injury  was  caused  by  another  employee  in 
the  same  service.  3.  The  defense  of  "contributory 
negligence."  This  was  a  contention  that  the  accident 
was  occasioned  solely  or  in  some  measure  by  the  care- 
lessness of  the  injured  workman. 

In  the  early  days  it  was  customary  for  the  master 
to  work  among  his  men  or  to  directly  oversee  their 
labor.  Under  such  condition  it  was  not  often  difficult 
to  determine,  with  justice  to  both  parties,  the  liability 
of  the  employer  for  the  results  of  accidents.  But,  with 
the  development  of  industry  along  complex  lines,  the 
establishment  of  the  factory  system,  and  the  existence 
of  large  plants  under  the  control  of  corporations,  it 
became  gradually  more  difficult  and  ultimately  almost 
impossible  to  fix  upon  the  employer  liability  for  neg- 
ligence. 

At  the  same  time  a  broader  conception  of  the  rights 
of  the  workmen  and  the  responsibility  of  the  employer 
gained  ground.  It  was  realized  that,  whilst  the  hazards 
to  which  the  workman  is  exposed  are  undertaken  for 
his  employer's  benefit  no  less  than  for  his  own,  there 
is  a  great  disproportion  in  the  respective  risks  of  con- 
sequence. Injury  to  a  workman  is  not  likely  to  entail 
upon  the  employer  worse  loss  than  that  of  a  few 
dollars,  but  it  may  permanently  destroy  the  earning 
capcity  of  the  victim.  Furthermore,  the  public  began 
to  recognize  the  fact  that  the  workman  and  his  labor 
are  the  essential  features  in  a  great  industrial  system 
of  which  the  community  at  large  is  the  beneficiary  and 
that  society  consequently  has  a  vital  interest  in  the 
matter. 

161 


An  agitation,  based  on  these  principles,  crystalized 
in  the  passage  of  the  Employer's  Liability  Act  of  1880 
in  Great  Britain.  In  1881  the  Reichstag  passed  a  bill 
making  insurance  against  sickness,  accident  and  dis- 
ability compulsory  on  all  workers  in  industrial  pursuits. 
The  system  was  not  modified  by  succeeding  acts 
and  extended  to  include  provision  for  death  and 
invalidity  from  any  cause.  The  requirements  of  these 
laws  are  not  carried  out  by  the  Government,  but  by 
the  joint  action  of  a  number  of  "Mutual  Associations," 
representing  the  various  industries. 

The  Employer's  Liability  Act  fell  far  short  of 
meeting  the  demands  of  the  situation.  In  1897  it  was 
amended  to  increase  the  liability  of  the  employer  on  the 
broad  principle,  as  stated  by  Asquith,  that  "when  a 
person  on  his  own  responsibility  and  for  his  own 
profit,  sets  in  motion  agencies  which  create  risks  for 
others,  he  is  morally  responsible  for  the  consequences 
of  what  he  does."  The  new  measure,  which  was  known 
as  the  Workmen's  Compensation  Act,  greatly  increased 
the  protection.  It  practically  provides  for  compensation 
in  all  cases  of  injury,  except  those  due  to  wilful  mis- 
conduct on  the  part  of  the  employee  and  even  that 
condition  does  not  exempt  the  employer  from  liability 
when  the  accident  results  in  death  or  permanent 
disability. 

Whilst  the  United  States  was  the  latest  among  the 
great  nations  to  adopt  legal  measures  for  the  compensa- 
tion of  workmen  injured  in  employment,  the  need  for 
such  legislation  was  greater  here  than  elsewhere.  Com- 
parison of  industrial  casualties  in  this  country  and 
abroad  is  greatly  to  the  disadvantage  of  the  former, 
although  efforts  at  improvement  in  recent  years  have 
reduced  the  disparity.  A  decade  ago  there  were  ten 
deaths  in  America  caused  by  boiler  explosions  to  every 
one  in  England  from  the  same  cause,  and  twenty-seven 
here  to  one  in  Germany.  Much  the  same  difference 
showed  in  other  lines  of  industrial  activity.  The  num- 
ber of  men  killed  in  mines  of  the  United  States  per 
thousand  employed  was  greater  than  the  combined 
numbers  so  killed  in  Great  Britain,  France  and  Belgium. 

In  1887  the  State  of  Massachussetts  passed  the  first 
employer's  liability  law  enacted  in  the  United  States. 
A  number  of  other  States  followed  in  rapid  succession 

162 


with  similar  legislation.  Beginning  in  1911,  the  various 
States'  legislatures  have  enacted  Workmen's  Compensa- 
tion measures,  until  at  present  a  law  of  this  description 
is  on  the  statute  books  of  nearly  every  State  and 
territory. 

Following  the  passage  of  the  Liability  Act  of  1880 
a  number  of  companies  were  organized  in  Great  Britain 
to  afford  employers  indemnity  for  damages  secured 
against  them  by  employees.  Several  of  these  concerns 
established  branches  in  the  United  States  and  still  do 
a  large  business  here  in  competition  with  numerous 
American  corporations. 

The  employee  is  not  a  party  to  the  contract  of 
Employer's  Liability  Insurance  and  is  not  protected 
by  it.  On  the  contrary,  it  is  to  the  interest  of  the 
underwriting  company  to  aid  the  employer  in  attempting 
to  avoid  liability.  With  the  general  introduction  of 
Workmen's  Compensation  laws,  the  field  for  Employers' 
Liability  Insurance  has  diminished  almost  to  the  point 
of  extinction. 

Several  States  have  set  up  systems  of  Workmen's 
Compensation  Insurance  to  the  exclusion  of  commercial 
corporations.  In  most  cases,  however,  the  employer  is 
allowed  the  choice  of  agencies,  even  when  State  funds 
are  provided  for  the  purpose  of  affording  the  insurance. 

Workmen's  Compensation  laws  contemplate  only 
accidents  which  occur  in  the  occupation  of  the  insured 
or  are  directly  connected  with  it.  The  entire  expense 
of  the  insurance  must  be  borne  by  the  employer.  In 
some  statutes  specific  penalties  are  provided  for  any 
attempt  on  the  part  of  the  employer  to  transfer  the 
cost  of  the  compensation,  or  any  part  of  it,  to  the 
employee. 

The  operation  of  the  Workmen's  Compensation  in 
the  United  States  is  in  an  experimental  and  unsatis- 
factory state.  It  cannot  be  said  to  have  yet  approached 
the  condition  of  a  coherent  system,  but  is  regulated 
by  a  number  of  state  laws  which  do  not  harmonize  in 
purpose,  scope  nor  detail.  This  lack  of  uniformity, 
even  in  essentials,  is  detrimental  to  workmen  as  well  as 
employers.  The  chief  sufferers,  however,  are  the  large 
corporations  which  do  an  interstate  business  and  main- 
tain plants  in  widely  separated  portions  of  the  country. 
To  them  the  necessity  of  complying  with  a  number  of 

163 


conflicting  statutes  is  especially  burdensome  and  ex- 
pensive. 

(The  most  enlightening  statement  of  the  present 
condition  of  Workmen's  Compensation  in  America  will 
be  found  in  the  report  of  an  investigation  concluded 
at  the  close  of  1915  by  the  Voluntary  Investigating 
Commission  of  Kentucky.  The  examination  embraced 
the  laws  of  a  number  of  States  and  particularly  those 
of  Kentucky,  California,  Ohio,  Indiana,  Massachussetts, 
West  Virginia,  Washington  and  Wisconsin.) 

Liability  Insurance  is  practised  in  a  number  of  forms 
other  than  those  which  have  been  considered.  For 
example,  policies  are  written  to  cover  Elevator, 
Public,  Landlord's  Vehicle  and  other  forms  of  liability 
for  the  results  of  accident. 

PERMANENT  TOTAL  DISABILITY 

This,  the  latest  form  of  casualty  insurance,  was 
introduced  to  America  by  the  Life  Insurance  companies 
and  is  at  the  present  time  mainly  written  in  connection 
with  their  policies.  Insurance  against  Permanent 
Total  Disability  originated  with  the  Mutual  Aid  So- 
cieties of  Germany  in  the  eighteenth  century.  It  was 
included  in  the  benefits  of  certain  Fraternal  Orders  of 
Great  Britain  and  America  several  years  before  1896, 
when  the  Fidelity  Mutual  Life  Insurance  Company  of 
Philadelphia  issued  the  first  Legal  Reserve  contract 
containing  a  Permanent  Total  Disability  clause.  A 
decade  elapsed  before  another  Company  adopted  the 
provision  and  it  remained  a  very  exceptional  feature 
of  Life  Insurance  until  about  ten  years  ago.  At  that 
time  beg'an  the  wave  of  promotion  which  added  two 
hundred  or  more  companies  to  the  Old  Line  ranks. 
The  new  companies  needed  "talking  points,"  and  many 
of  them  adopted  the  Permanent  Total  Disability  clause. 
It  is  now  found  in  the  contracts  of  fully  three-fourths 
of  American  companies,  including  nearly  all  the  leading 
ones. 

There  is  a  great  difference  between  the  various 
policy  provisions  in  this  connection,  both  as  to  the  ex- 
tent of  benefit  guaranteed  and  as  to  definition  of  terms. 
In  some  cases  the  protection  is  more  apparent  than 
actual  and  the  clause  referring  to  it  is  drawn  in  vague 
and  ambiguous  language.  It  is  impossible  to  escape 

164 


the  conviction  that  in  such  instances  there  is  a  de- 
liberate intent  to  deceive  the  purchaser  of  the  policy. 
Although  these  are  the  exceptional  cases,  there  is  a  gen- 
eral need  of  greater  precision  in  the  clause  and  a  defini- 
tion of  the  condition  contemplated  in  such  terms  as  to 
admit  of  but  one  interpretation. 

The  difficulty  in  the  way  of  a  comprehensive  and 
precise  definition  promises  to  be  a  source  of  much 
trouble  to  the  companies  in  the  future.  A  certain 
injury  may  cause  total  disability  in  the  case  of  one 
man  and  fall  far  short  of  it  in  the  case  of  another.  For 
example:  There  would  be  a  great  difference  in  effect  of 
the  loss  of  feet  to  a  bookkeeper  and  to  a  ballet  dancer; 
the  loss  of  hands  to  a  bank  president  and  a  cartoonist ; 
the  loss  of  sight  to  an  attorney  and  a  tea-taster.  It 
seems  that  any  definition  should  include  as  an  essential 
element  incapacity  for  any  work  for  which  the  insured 
is  fitted  by  experience  and  training. 

It  is  probable  that  we  shall,  in  course  of  time,  derive 
a  standard  technical  definition  of  "permanent  total  dis- 
ability" from  experience  combined  with  legal  decisions 
on  the  question,  in  the  same  way  as  we  have  acquired 
the  technical  definition  of  an  "accident."  In  the 
meanwhile  it  is  practically  certain  that  most  companies 
will  act  in  a  liberal  spirit  of  equity  when  any  question- 
able claim  is  presented  and  that  doubtful  cases  will  be 
considered  on  their  individual  merits,  rather  than  on  a 
liberal  interpretation  of  the  policy  provision. 

A  company  which  contemplates  fair  and  liberal 
treatment  of  all  bona  fide  claimants  may  prudently 
protect  itself  against  fraud  by  a  contract  clause  ex- 
pressing the  minimum  benefit  it  purposes  providing 
or  the  most  restrictive  conditions  it  intends  to  enforce. 
On  the  other  hand,  a  company  which  views  its  Perma- 
nent Total  Disability  provision  as  a  selling  feature 
rather  than  a  substantial  protection  to  the  policyholder, 
will  construct  the  clause  with  a  view  to  limiting  its 
liabilities  as  much  as  possible,  and  will  avail  itself  of 
the  utmost  technical  advantage  in  making  settlements. 

Several  companies  insure  against  permanent  total 
disability  "from  any  cause  whatever."  The  majority  of 
clauses  except  certain  causes.  In  some  it  is  agreed 
that  the  loss  of  two  limbs  or  of  the  entire  sight  "shall 

165 


be  deemed  to  constitute  permanent  total  disability," 
even  though  the  insured  may  not  be  incapacitated  for 
the  pursuit  of  gainful  occupation. 

The  Permanent  Total  Disability  benefit  takes  a 
variety  of  forms.  With  most  companies  it  consists  of 
a  waiver  of  premiums  and,  in  effect,  granting  to  the 
insured  a  paid-up  policy  payable  at  death.  A  large 
number  of  Permanent  Total  Disability  clauses  provide 
for  the  treatment  of  the  policy  as  a  death  claim  and 
the  payment  of  its  face  amount  in  ten,  fifteen  or  twenty 
annual  instalments.  In  other  instances  the  insured 
is  exempted  from  payment  of  further  premiums  which 
are,  however,  made  a  lien  against  the  policy. 

The  extra  charge  for  the  Permanent  Total  Disability 
feature  varies  greatly  with  the  different  companies, 
there  being  no  acceptable  standard  by  which  to  value 
the  risk,  nor  any  satisfactory  statistics  upon  which  to 
form  one.  At  present  most  of  the  available  data  on 
the  subject  consists  of  statistics  relating  to  industrial 
exposures  in  Germany,  the  Friendly  Societies  of  Great 
Britain  and  the  Fraternal  Orders  of  America.  None  of 
these  classes  of  risks  are  typical  of  the  insured  in 
Legal  Reserve  companies.  Other  facts  connected  with 
the  statistics  in  question  render  them  of  doubtful  ap- 
plicability. Until  the  experience  of  the  companies 
furnishes  reliable  data  definite  information  on  the  im- 
portant phases  of  the  risk  will  be  lacking. 

S.  H.  Pipe,  Franklin  Mead  and  Alfred  Hunter  have 
each  deduced  tables  from  the  sources  mentioned.  Those 
of  the  last  named  are  generally  admitted  to  be  the 
most  practicable  and  have  been  adopted  by  the  Insur- 
ance Department  of  the  State  of  New  York  for  purposes 
of  valuation. 

The  following  table,  compiled  by  Sidney  Pipe,  indi- 
cates the  probability  of  Permanent  Total  Disability 
occurring  within  the  life  expectancy: 

AGE  EXPECTANCY  PROBABILITY 

20  42.20  Years  4.60  per  cent. 

25  38.81  6.04    " 

30  35.33       "  8.03     "       " 

35  31.78       "  10.80    " 

40  28.18  14.66 

166 


45 
50 
55 
60 
65 
70 


24.54 
20.91 
17.40 
14.10 
11.10 
8.48 


19.77 
26.52 
35.73 
47.58 
61.34 
74.77 


It  will  be  noted  that  the  probability  of  permanent 
total  disability  increases  very  rapidly  after  middle  age, 
until  the  risk  becomes  an  extremely  great  one,  largely 
because  senility  becomes  a  cause  in  latter  life.  For 
this  reason  the  Permanent  Total  Disability  clause  in 
policies  almost  invariably  expires  at  age  of  60  or  earlier. 
This  being  the  case,  a  different  set  of  figures  from  the 
above  would  be  necessary  to  indicate  the  probability 
value  of  the  provision  to  a  policyholder. 

S.  H.  Pipe's  analysis  exhibits  the  following  causes 
of  permanent  total  disability:  consumption  234  per 
thousand;  paralysis  127;  insanity  120;  diseases  of 
circulatory  system  72;  diseases  of  urinary  system  52; 
cancer  47;  acicdental  injury  44;  balance  301.  All 
the  specified  causes  come  under  the  head  of  "bodily 
injury  or  disease,"  but  it  is  probable  that  a  considerable 
proportion  of  the  "balance"  would  be  accounted  for 
by  natural  disability  incident  to  old  age. 

From  the  same  analysis  it  is  deduced  that  the 
average  interval  of  time  between  the  occurrence  of 
permanent  total  disability  and  death,  for  all  causes, 
is  one  year,  and  five  months.  The  investigation  shows 
that  the  rate  of  mortality  among  the  disabled  is  affected 
much  less  by  age  than  by  the  cause  or  the  fact  of  dis- 
ability. The  fact,  irrespective  of  the  cause,  may  be 
presumed  to  exert  a  potent  influence  on  mortality,  on 
the  assumption  that  a  totally  disabled  person  is  apt  to 
lose  his  mental  grip  on  life.  This  view  is  supported 
by  the  fact  that  the  mortality  among  disabled  lives  is 
higher  at  the  younger  than  at  the  older  ages. 

From  the  available  data  it  would  seem  that  the 
permanent  total  disability  risk,  if  not  assumed  after 
age  60,  is  a  comparatively  slight  one.  It  must  be 
borne  in  mind  that  the  cases  involved  are  provided  for 
in  the  mortality  tables  and  the  extra  liability  assumed 
by  the  company  is  the  payment  by  it  of  premiums  after 
the  occurrence  of  the  disability  or  the  payment  of  the 


167 


policy  in  instalments.  Under  the  latter  condition  the 
company  enjoys  the  compensatory  advantage  of  the 
difference  between  the  value  of  the  instalments  and  the 
principal  sum.  In  any  case  the  liability  assumes  small 
proportion  in  view  of  the  unquestionable  shortness  of 
the  average  period  of  survival  after  total  disablement. 
But  if  the  risk  is  slight,  so  also  is  the  charge  for  it, 
whilst  the  measures  of  protection  is  great  when  the 
probability  of  occurrence  and  usually  serious  con- 
sequences of  permanent  total  disability  are  considered. 
(For  further  information  on  the  subjects  dealt  with 
in  this  paper  see  "Accident  and  Health  Insurance,"  The 
Insurance  Institute  of  Hartford,  1915;  "The  Business 
of  Insurance,"  Dunham,  vol.  2;  "The  Measure  of  Risk 
and  Liability  Under  the  Total  and  Permanent  Disability 
Benefits  in  Life  Insurance  Policies,"  Franklin  B.  Mead, 
in  the  Proceedings  of  the  American  Life  Convention, 
1909;  "Disability  Benefits,"  Moir,  in  the  Proceedings 
of  the  Association  of  Life  Insurance  Presidents,"  1913.) 


S134 

168 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

XV 

141.     What  was  the  nature  of  the  coverage  afforded  by 
the  earliest  Accident  companies? 

Insurance  against  accidents  incurred  in  travel  on 
railroads  and  steamship  lines. 

1  42.     About  what  percentage  of  policies  involve  claims? 
Somewhat  more  than  10  per  cent. 

\  43.     What  is  the  universal  period  of  an  Accident  policy? 
One  year. 

1  44.     What  appears  to  be  the  chief  need  of  the  Accident 
Insurance  business? 

The  reduction  of  "frills"  and  improvement  along 
the  lines  of  essential  features. 

145.     What  is  the  Standard  Provisions  Law? 

An  Act  passed  in  1914  providing  for  the  incorpora- 
tion of  certain  provisions  in  Accident  contracts  and 
the  employment  of  uniform  phraseology  in  setting 
them  forth. 

\  46.     Name  the  different  classes  of  Stock  Accident  com- 
panies. 


Commercial,  Industrial,  Ticket  and  Workmen's  Col- 
lective Accident  Insurance. 

147.  What  is  the  chief  weakness  of  the  Industrial  Acci- 
dent Insurance  business? 

Excessive  cost  of  securing  new  business  and  high 
lapse  rate. 

148.  What  is  the  latest  kind  of  Accident  Insurance? 

Workmen's  Compensation  Insurance. 

1 49.  What    is    the    chief    need    in    connection    with    the 
Permanent  Total   Disability  provision  in  general? 

A  clear  and  uniformly  accepted  definition  of  "per- 
manent total  disability.9' 

150.  At  age   30  what  is  the  probability  of  Permanent 
Total    Disability   during   the   term    of   life    expect- 
ancy? 

Slightly  more  than  8  per  cent. 


XVI 

Bteabtlitp 

$art  2 

ACCIDENT  AND  SICKNESS  INSURANCE-COMBINATION 
INSURANCE 

BY  FORBES  LINDSAY 

A  medical  examination  is  not  made  in  connection  with 
applications  for  Accident  and  Sickness  Insurance. 
Usually,  all  the  information  secured  regarding  the  risk 
is  derived  from  the  application  form.  This  document 
is,  therefore,  more  significant  and  important  than  that 
to  which  the  applicant  for  Life  Insurance  attaches  his 
signature.  The  Standard  Provisions  Law  requires  the 
inclusion  in  the  contract  of  the  following  clause:  "No 
statement  made  by  the  applicant  for  insurance  not  in- 
cluded herein  shall  avoid  the  policy  or  be  used  in  any 
legal  proceeding  hereunder."  In  defense  of  this  condi- 
tion companies  now  require  the  signature  of  the  applicant 
to  the  application  form,  which  is  incorporated  in  the 
policy.  Moreover,  the  application  contains  the  follow- 
ing clause,  or  one  to  similar  effect:  "I  understand  and 
agree  that  the  right  to  recovery  under  any  policy  which 
may  be  issued  upon  the  basis  of  this  application  shall  be 
barred  in  the'  event  that  any  one  of  the  following  state- 
ments, material  either  to  the  acceptance  of  the  risk  or  to 
the  hazard  assumed  by  the  company,  is  false,  or  in  the 
event  that  any  one  of  the  following  statements  is  false 
and  made  with  intent  to  deceive. " 

(The  applications  and  policies  of  stock  companies  are 
almost  standard  in  form  and  those  of  the  Pacific  Mutual 
have  been  used  in  this  connection.  The  student  is  ad- 
vised to  examine  that  Company's  "Eureka"  Disability 
Policy  in  relation  to  this  paper.) 

The  most  important  questions  in  the  application  for 
Accident  Insurance  refer  to  state  of  health,  past  and 
present,  physical  or  mental  impairments,  occupation, 

Copyrirhted  1916.  by  the  Pacific  Mutual  Life  Insurance  Company  of  California 


other  insurance  carried  or  applied  for,  name  and'  relation- 
ship of  beneficiary. 

Should  an  undeclared  impairment  of  the  risk  exist  at  the 
time  of  making  application,  the  consequent  contract  would1 
be  tainted  and  subject  to  repudiation  by  the  company,  and 
this  regardless  of  the  intent  of  the  applicant  in  failing  to 
divulge  the  impairment.  The  assumption  that  all  the 
facts  material  to  the  hazard  have  been  stated  in  the 
application  underlies  the  entire  contract  and  any  condi- 
tion to  the  contrary  affords  the  company  a  strong  defense 
against  claims  under  the  policy. 

The  principle  of  Accident  and  Sickness  Insurance  is 
to  provide  indemnity  for  the  loss  of  time  at  its  monetary 
value  to  the  insured,  measured  by  his  regular  or  average 
earnings.  Any  element  of  speculation  or  any  conditions 
which  tends  to  place  a  premium  on  injury  is  in -conflict 
with  this  principle. 

The  insurance  is  issued  for  a  term  of  three,  six,  or 
twelve  months,  with  rare  exceptions.  The  contract  may 
be  renewed  or  continued  beyond  the  stipulated  period  by 
mutual  agreement,  the  indications  of  which  are  the  pay- 
ment  of  another  premium  by  the  insured  and  its  accept- 
anee  by  the  company. 

The  policy  contains  the  following  clause :  "The  com- 
pany may  cancel  this  policy  at  any  time  by  written  notice 
delivered  to  the  insured  or  mailed  to  his  last  address, 
*  *  *  together  with  cash  or  the  company's  check  for 
the  unearned  portion  of  the  premiums  actually  paid  by 
the  insured,  and  such  cancellation  shall  be  without  preju- 
dice to  any  claim  originating  prior  thereto/' 

The  privilege  retained  to  the  company  in  this  clause  is 
a  highly  important  one,  fully  recognized  by  the  framers 
of  the  Standard  Provisions  Law.  If  the  insurer  were  not 
thus  enabled  to  dispose  of  impaired  and  undesirable 
risks,  the  charges  for  Disability  Insurance  would  neces- 
sarily be  considerably  greater  than  they  are  at  present. 
Most  of  the  dissatisfaction  with  this  form  of  insurance 
arises  from  failure  on  the  part  of  the  insured  to  under- 
stand the  limited  term  for  which  the  contract  is  issued 
and  the  right  of  the  company  to  discontinue  the  insurance 
at  will. 

The  "insuring  clause"  is  the  vital  feature  of  a  Disabil- 

170 


ity  poTicy.     With  slight  variations  of  phraseology,  'it  runs 
iin  the  following  form  in  an  Accident  policy: 
-does  hereby  insure  John  Doe  against  loss  resulting  from 
t>odily  injuries  effected  directly  and  independently  of  all 
other  causes  through  accidental  means." 

The  limitations  of  tine  coverage  under  this  clause  are 
^commonly  misunderstood  by  insurers  and,  sometimes, 
by  agents.  The  concluding  words,  ""accidental  means," 
are  uniformly  employed  with  the  intent  to  draw  a  distinc- 
tion between  injuries  which  may  properly  be  attributable 
to  such  causes  and  other  injuries  resulting  from  accident. 
An  accident  or  -casualty  may  be  the  outcome  of  a  delib- 
erate and  intentional  act  on  the  part  of  the  victim,  or  it 
may  be  the  consequence  of  his  unintentional  act  and  be 
caused  by  conditions  beyond  his  control.  The  policy 
does  not  contemplate  protection  against  the  former  class 
•of  injuries,  but  against  the  latter  class. 

The  Supreme  Court  of  the  United  States,  construing 
the  insuring  clause  of  an  Accident  policy,  ruled  that: 
""If  a  result  is  such  as  follows  from  ordinary  means 
voluntarily  employed  in  not  an  unusual  and  unexpected 
way,  it  cannot  be,  as  a  result,  effected  by  accidental 
means,  but  if,  in  the  act  which  precedes  the  injury, 
something  unforeseen,  unexpected  or  unusual  occurs 
which  produces  the  injury,  then  the  injury  has  resulted 
from  accidental  means." 

Let  us  suppose  that  a  man  is  swinging  Indian  clubs 
in  the  customary  manner  and  through  sheer  carelessness 
or  awkwardness  strikes  his  head,  the  resultant  injury 
would  not  be  "accidental,"  according  to  the  foregoing  in- 
terpretation. If,  on  the  other  hand,  whilst  being  swung 
in  the  ordinary  manner,  the  club  should  strike  a  chan- 
delier and  be  deflected  to  the  insured's  head,  the  injury 
would  have  resulted  from  "accidental  means." 

It  may  be  added  that,  when  used  in  Workmen's  Com- 
pensation Laws,  the  word  "accident"  is  given  a  much 
broader  meaning  than  it  has  in  Commercial  Accident  In- 
surance. 

The  words  "external  and  violent"  have  been  generally 
eliminated  from  the  insuring  clause.  In  view  of  the  in- 
terpretation of  the  phrase  by  the  courts  it  has  ceased  to 
exercise  any  restrictive  effect.  For  example,  it  has  been 

171 


held  that  choking,  suffocation,  internal  poisoning,  and 
nervous  shock  were  sound  bases  for  claims  under  policies 
which  purported  to  cover  only  such  injuries  as  were 
occasioned  by  "external  and  violent"  agencies.  It  would 
appear  that,  provided  the  element  of  fortuitous  origin, 
can  be  established,  compensation  may  be  secured  for  any 
accidental  result. 

In  cases  of  death  occasioned  by  unquestionable  acci- 
dental means  the  further  consideration  arises  as  to 
whether  the  fatal  injury  was  the  sale  cause.  A  man 
suffering  from  heart  trouble,  for  instance,  may  be  killed! 
by  an  accident  which  would  not  have  proved  fatal  to  a 
healthy  person.  Under  such  circumstances  the  com- 
pany would  not  be  liable.  A  claim  would  hold,  however,, 
where  it  could  be  shown  that,  although  a  pre-existing 
disease  or  infirmity  was  a  contributory  cause,  the  acci- 
dental injury  was  sufficiently  severe  in  itself  to  have  pro- 
duced the  result. 

When  an  injury  caused  by  accidental  means  is  the 
direct  origin  of  a  disorder  or  connected  sequence  of  dis- 
orders', culminating  in  death,  although  the  final  cause  may 
be  disease,  the  company  is  liable.  The  principle  is  that 
any  continuous  chain  of  conditions  terminating  in  death 
constitute  ground  for  compensation  when  the  originating 
cause  was  an  accident  within  the  meaning  of  the  contract, 

A  consideration  of  these  conditions  will  reveal  the 
reason  for  the  ninety  day  limitation  clause.  Its  purpose 
is  to  afford  time  for  the  development  of  the  results  of 
accident  and  to  facilitate  establishing  the  connection  of 
the  ultimate  loss  with  the  originating  cause. 

It  should  be  understood  that  in  all  cases  it  is  the  pur- 
pose of  the  company  to  fulfill  the  terms  of  its  contract 
and  to  do  strict  justice  to  the  insured.  With  this  assur- 
ance in  mind,  the  agent  should  adopt  an  attitude  of  im- 
partiality toward  questionable  claims  and  not  one  of 
partisan  support  of  the  claimant,  as  he  commonly  does. 

Only  the  essential  features  of  the  policy  and  the  prin- 
ciples involved  in  the  insurance  are  treated  in  this  paper. 
The  many  minor  benefits  provided  by  the  contract  and 
the  various  conditions  contained  in  it  may  be  ascertained 
from  the  document  itself. 

172 


HEALTH  INSURANCE 

This  form  of  protection  is  usually  provided  in  connec- 
tion with  Accident  Insurance  and  the  coverage  afforded 
by  regular  companies  embraces  every  kind  of  sickness 
and  disease.  The  insuring  clause  of  the  policy  under 
consideration  briefly  states  that  the  insured  is  protected 
against  loss  resulting  from  "illness,  as  hereinafter  defined, 
contracted  by  the  insured  during  the  term  of  the  policy, 
but  not  within  fifteen  days  from  the  time  this  policy 
becames  effective,  and  for  which  the  insured  is  treated 
by  a  licensed  physician." 

Whilst  Accident  Insurance  provides  indemnity  for 
partial  disability,  when  the  insured  may  be  capable  of 
some  degree  of  business  activity,  Health  Insurance  is 
effective  only  so  long  as  the  insured  is  totally  disabled 
and  employing  the  services  of  a  physician.  A  further 
condition  of  the  payment  of  full  indemnity  is  complete 
confinement  by  the  insured.  Provision  is  made,  how- 
ever, for  convalescence.  During  this  period,  imme- 
diately following  that  of  complete  confinement,  the  in- 
sured, although  able  to  leave  the  house,  will  receive  half 
the  weekly  indemnity  provided  by  the  contract,  provided 
he  is  still  totally  disabled  and  requiring  medical  atten- 
tion. 

The  Health  policy  usually  contains  a  provision  cover- 
ing permanent  disability,  the  indemnity  varying  with 
different  companies. 

In  Health  Insurance  a  most  important  question  is  the 
time  of  inception  of  the  disease  on  which  a  claim  is  based. 
It  is  a  fundamental  principle  of  this  form  of  protection 
that  the  disabling  complaint  must  have  its  beginning 
within  the  term  of  the  policy.  This  "beginning"  does 
not  mean  the  time  at  which  the  insured  became  distinctly 
sick  or  the  time  when  an  abnormal  condition  became 
manifest,  but  the  time  at  which  the  originating  patho- 
logical process  set  in.  It  will  readily  be  understood  that 
a  long  interval  may  separate  the  inception  of  a  disease 
from  the  development  of  pronounced  symptoms.  The 
Health  policy  pre-supposes  that  the  applicant  is  not  only 
consciously  well,  but  actually  healthy  and  sound. 

The  application  for  a  Health  policy  requires  a  state- 

173 


ment  that  the  applicant  has  not,  to  his  knowledge,  been 
recently  exposed  to  any  infectious  disease,  that  he  is  in 
sound  condition,  physically  and  mentally,  together  with 
a  medical  history  of  the  past  five  or  seven  years. 

ADJUSTMENTS  OF  CLAIMS 

The  Standard  Provisions  Law  specifies  the  following 
clause  for  insertion  in  Disability  policies :  "Written  no- 
tice of  an  injury  or  of  sickness  on  which  claim  may  be 
based  must  be  given  to  the  company  within  twenty  days 
after  the  date  of  the  accident  causing  such  injury,  or 
within  ten  days  after  the  commencement  of  disability 
from  such  sickness.  In  event  of  accidental  death  imme- 
diate notice  thereof  must  be  given  to  the  company." 

Of  these  three  requirements,  that  relating  to  sickness 
is  the  most  important,  and  that  upon  which  the  com- 
pany lays  the  greatest  insistence.  This,  because  with 
the  passage  of  time  both  the  opportunity  for  imposition 
and  the  difficulty  of  making  searching  medical  examina- 
tion increase.  The  former  contingency  is  of  less  concern 
to  the  company  than  the  latter — by  far  the  majority  of 
claims  are  advanced  in  good  faith,  but  many  are  invalid 
or  defective  by  reason  of  misunderstanding  on  the  part 
of  the  insured.  For  this  reason  the  company,  on  receipt 
of  notice  of  injury  or  sickness,  forwards  a  blank  which, 
when  filled  in  and  accompanied  by  the  certificate  of  the 
medical  attendant,  furnishes  the  basis  for  settlement. 

The  correspondence  may  disclose  physical  impair- 
ment or  pre-existent  disease  not  mentioned  in  the  appli- 
cation and  constituting  a  breach  of  warranty.  In  such 
cases  the  services  of  the  company's  local  examiners  are 
required,  a  clause  in  the  policy  providing  for  facility  in 
making  medical  examination  of  the  insured. 

The  investigation  of  a  claim  will  sometimes  discover 
the  fact  that  the  insured  was  not  correctly  classified  at 
the  time  of  making  application  or  that  he  has  since 
changed  his  occupation  to  one  more  hazardous  than  that 
under  which  he  was  written.  A  clause  in  the  contract 
makes  equitable  provision  for  such  a  situation,  stipulat- 
ing that  in  the  event  of  the  insured  being  injured  whilst 
in  the  pursuit  of  an  occupation  more  hazardous  than  that 

174 


covered  by  the  policy,  or  when  performing  an  act  per- 
taining to  a  more  hazardous  occupation,  he  shall  be 
entitled  to  no  more  than  such  proportion  of  the  indemni- 
ties provided  by  the  policy  as  the  premium  paid  would 
have  purchased  at  the  rate  for  the  more  hazardous  occu- 
pation. 

The  prorating  clause  works  full  justice  to  the  insured. 
He  receives  the  precise  amount  of  protection  for  which 
he  pays.  In  case  of  his  being  injured  whilst  engaged  in 
recreation  or  the  ordinary  affairs  of  private  life  the  pro- 
rating clause  is  not  effective. 

The  course  of  an  investigation  of  a  claim  may  reveal 
other  Disability  insurance,  not  mentioned  in  the  appli- 
cation for  the  policy,  making  the  total  coverage  in  excess 
of  the  amount  justified  by  the  insured's  earnings.  More 
than  one  course  is  open  to  the  company  in  the  adjustment 
of  such  a  case.  If  the  insured,  at  the  time  of  applying  to 
the  company,  had  other  insurance  which  he  failed  to  men- 
tion in  the  application,  his  failure  would  constitute  a 
breach  of  warranty,  nullifying  the  contract.  According 
to  the  Standard  Provisions  Law  the  company's  liability 
in  such  circumstances  would  depend  upon  whether  the 
claimant  omitted  to  mention  the  other  insurance  with 
fraudulent  intent  or  whether  the  omission  materially 
affected  the  acceptance  of  the  risk.  The  former  question 
would  be  one  generally  impossible  of  decision. 

In  case  the  insured  takes  other  policies  after  the 
issuance  of  the  original  contract  it  is  required  by  the 
terms  of  the  policy  that  he  shall  notify  the  company  or 
companies  already  covering  him.  Failing  to  do  this,  he 
can  only  recover  under  any  one  contract  such  portion  of 
the  indemnity  provided  by  it  as  that  indemnity  bears  to 
the  whole  amount  of  Disability  insurance  carried  by  him. 

By  way  of  illustration,  let  us  suppose  that  a  person 
whose  earnings  are  $40  per  week  takes  an  Accident  policy 
giving  that  amount  of  weekly  indemnity  and  afterwards 
adds  three  similar  policies.  In  the  event  of  a  claim,  the 
original  company's  liability  would  be  40/160,  or  $10  per 
week.  The  later  insurance  would  not  have  been  placed 
in  the  light  of  the  facts,  and  the  companies  concerned 
would  have  a  right  to  deny  liability,  or  they  might  pro- 
rate on  the  same  basis  as  the  first. 

175 


It  may  be  added  that  in  case  a  man's  earnings  at  the 
time  of  application  warrant  the  amount  of  indemnity 
afforded  by  the  contract,  but  afterwards  decrease,  the 
company  has  no  right  to  prorate  his  claim. 

COMBINATION  INSURANCE 

About  fifteen  years  ago  a  few  companies,  whose  char- 
ters permitted  them  to  do  so,  introduced  the  innovation 
of  Life  and  Disability  Insurance  combined  in  one  con- 
tract. The  Pacific  Mutual  was  one  of  the  pioneers  in 
this  movement.  A  step  in  the  same  direction  has  since 
been  taken  by  a  majority  of  the  Life  companies  in  adding 
the  Permanent  Total  Disability  feature  to  their  policies, 
whilst  a  few  of  them  have  made  a  further  advance  by 
issuing  Life  policies  providing  for  double  indemnity  in 
the  event  of  death  from  accident  when  traveling  in  a 
public  conveyance. 

The  closest  relation  exists  between  Life  insurance  and 
Disability  Insurance.  This  seems  to  have  been  recog- 
nized by  the  incorporators  of  the  earliest  American  Life 
Insurance  companies  and  by  the  authorities  from  whom 
the  charters  were  derived.  The  oldest  of  these  docu- 
ments contemplated  provision  by  the  companies  for  all 
kinds  of  personal  protection. 

There  can  be  no  objection  in  principle  to  the  combi- 
nation. If  it  is  desirable  and  proper  for  a  Fire  Insurance 
company  to  indemnify  for  partial  loss,  is  it  not  equally 
desirable  and  proper  for  a  Life  Insurance  company  to  do 
so?  The  primary  purpose  of  Life  Insurance  is  to  com- 
pensate for  the  permanent  loss  of  income  resulting  from 
the  death  of  the  insured.  It  would  appear  to  be  highly 
logical  that  the  policy  which  provides  this  benefit  should 
also  compensate  for  the  temporary  loss  of  income  result- 
ing from  accident  or  sickness. 

Perhaps  the  chief  point  to  be  urged  in  favor  of  the 
combination  of  Life  and  Disability  Insurance  is  the 
economy  involved  in  it.  The  arrangement  has  advan- 
tages for  both  company  and  insured.  The  former  gains 
from  the  better  selection  of  risks  consequent  on  medical 
examination  and  inspection;  the  latter,  from  the  lower 
cost  due  to  the  saving  incident  to  better  risks. 

176 


PACIFIC  MUTUAL  SCHOOL 
FOR  SALESMEN 


FIRST  POST-GRADUATE  COURSE 


QUESTIONS  AND  ANSWERS 

XVI 

151.  What  is  the  purpose  of  Disability  Insurance  ? 

To  afford  indemnity  for  loss  of  time  having  a  mone- 
tary value. 

152.  Name  the  vital  feature  of  a  Disability  contract. 

The  Insuring  Clause. 

153.  Briefly  define  the  word  "accident"  in  its  technical 
sense. 

An  occurrence  of  fortuitous  and  unexpected  char- 
acter resulting  in  a  physical  injury. 

154.  In  case  of  death  by  accident  what  further  consid- 
eration arises? 

The  question  as  to  whether  the  accident  was  the 
sole  cause. 

155.  Is  partial  disability  considered  in  Health  Insurance? 

Under  Health  Insurance,  indemnity  is  paid  for  total 
disability  only. 

156.  What  conditions  are  essential  to  support  a  claim 
for  sickness  indemnity? 

Complete  incapacity  for  business  and  the  attend- 
ance of  a  regular  physician. 

8-181X 


157.  What  is  meant  by  the  "beginning"  of  a  disease? 

The  time  of  pathological  inception,  regardless  of  the 
development  of  symptoms  or  the  consciousness  of 
the  victim. 

158.  If  the  investigation   of  a   claim   discloses   that  the 
insured  was  not  properly  classified  at  the  time  of 
being  insured,  is  the  contract  invalid? 

No.     Adjustment  is  made  by  pro-rating  the  indem- 


\  59.     What  fact  regulates  the  amount  of  Disability  Insur- 
ance which  will  be  issued  on  a  risk? 

The  regular  or  average  earnings  of  the  insured. 

\  60.     What  is  the  chief  point  to  be  urged  in  favor  of 
Combination  Insurance? 

Saving  in  cost  to  the  insured. 


THE  FOLLOWING  CORRECTIONS  SHOULD  BE  MADE  IN  THE 
TEXT  OF  THIS  VOLUME 


No.    IV   — p.       42,    2nd  line,   "but  nothing"   instead  of  "and  noth- 
ing." 

I  Oth  line,    omit   "$"   before   "69,804." 
13th  line,  "but"  in  place  of  "and." 
1  Oth    line    from    foot    of   page,    substitute    "this 
section"  for  "the  foregoing  paper." 

No.    V     — p.       50,    column  5,  substitute   "86''  for  "8.60.", 

^1  i.       7  „        'Is11 

No.    Vll  — p.      65,    2nd    paragraph,     2nd    line,    change    "this"    to 

"his." 
p.       67,    last    line    of     1st    par.,    "premium"    instead    of 

"premiums." 

p.  70,  1st  par.,  under  "Policy  Loans,"  in  1st  line 
change  "provisions"  to  "provision." 

No.    VIII — p.       77,    I8t   par.,    5th   line,    strike   out   "the   latter,    but 
involves,"    and    insert    "Whole    Life,    and    of 
involving." 
5th  par.,  3rd  line,  after  "becomes"  insert  "an 

almost." 

p.  78,  in  last  line  of  4th  par.,  after  "and"  substitute 
"withhold"  in  place  of  "withholds." 

No.    IX    — p.      88,    in    last    line    of    1st    par.,    substitute    "printed" 

for   "written." 

p.  91,  5th  par.,  insert  a  comma  after  "dividends," 
and  also  after  "earnings." 

No.    X     p.       97,    in   place    of  the    4th   paragraph,    substitute    the 

following:  "Stock  companies  are  those  of 
which  the  management  is  entirely  con- 
trolled by  stockholders.  As  a  rule  the 
stock  company's  business  is  confined  to 
Non-participating  insurance." 

p.  100,  2nd  par.,  under  "Industrial  Life  Insurance," 
in  1st  line  change  "1914"  to  "1916";  sec- 
ond line,  substitute  "35,780,000"  for 
"31,000,000";  line  three,  "$4,800,000,000" 
for  "$4,000,000,000";  and  in  line  six 
change  "29"  to  "24." 

p.  101,  5th  line  of  3rd  par.,  change  "occupations"  to 
"occupation." 

No.    XI    p.     109,    3rd  par.,   2nd  line,  strike  out  the  word  "right." 

p.    110,    next    to    last    par.,    5th    line,    change    "an"    to 

"and." 

p.  113,  1st  line,  in  place  of  "$9,000,000,000"  sub- 
stitute "upward*  of  $9,600,000,000." 


2nd  line,  in  place  of  "$1,500,000,000"  sub- 
stitute "more  than  $2,100,000,000." 

3rd  line,  substitute  "$600,000,000"  in  place 
of  "$500,000,000." 

No.  XII  p.  I  1  7,  8th  line,  substitute  "comptroller"  for  "treas- 
urer.' 

p.  119,  6th  par.,  strike  out  portion  of  second  sentence 
beginning  "the  Comptroller,"  and  substi- 
tute the  following:  "who  also  perform  other 
duties." 

p.  129,  next  to  last  par.,  after  "claims"  insert  "arising 
from  Life  policies  and." 

No.    XIII — p.    133,    1st    par.,    5th    line,    strike    out    "include"    and 
insert  "are  made  up,  for  the  most  part,  of." 
1st  par.,  last  line,  change  "next"  to  "present." 
p.    137,    3rd  par.,  4th  line,  after  "rates  of"  insert  "con- 
servative." 

No.    XIV— p.    145,    1st  line  of  last  par.,  change  "1885"  to  "1855." 

p.    147,    2nd  par.,   5th  line,   change  "ever"  to  "every." 

p.    148,    1st    line    of    4th    par.,    in    place    of    "original 

annuities"  insert  "supplementary  contracts." 

1  1th  line,  4th  par.,  substitute  "both"  for  "the 

former." 
12th    line,    4th    par.,    change    ""classification" 

to   "classifications." 
p.    151,    4th    line,     2nd    par.,    after    "per    cent"    insert 

"of  premium   income." 

4th  par.,  line  5,  after  "supervision"  insert 
"the  chief  of  which  is  the  Supreme  Court 
decision  that  Life  Insurance  is  not  com- 
merce." 

No.    XV — p.    153,    3rd  par.,   2nd  line,  strike  out   "absence  from" 

and  substitute   "presence  in." 
p.    156,    last  par.,  in  5th  line   change   "information"   to 

"informative." 

p.  157,  line  12  from  top  of  page,  "include"  instead 
of  "included";  lines  13  and  14,  insert  paren- 
theses before  the  word  "applied"  and  after 
"disability";  and  in  line  14  change  "same" 
to  "some." 
p.  158,  2nd  par.,  4th  line,  substitute  "corporations" 

for  "correspondence." 

p.    158,    last  line,  "practiced"  instead  of  "practical." 
p.    159,    2nd    par.,     1st   line,    change    "filled"   to   "fills." 
p.    162,    1st  par.,  6th  line,   strike  out  "not." 

No.    XVI — p.    173,    1st   par.,   next  to  last  line,    "becomes"    instead 

of  "becames." 

p.  1  73,  2nd  par.,  next  to  last  line,  "receiving"  for 
"requiring." 


S  371 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 

AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


APR     2  193' 

NOV    8    1934 

w*  141935 

N>6    6     ^ 

^o\9A\ 

tf  ft  ** 

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«  Doc  53  C8 

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TuU*6lBtt 

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,.^  W 

LD21-100m-7,'33 

UNIVERSITY  OF  CALIFORNIA  LIBRARY 


